The Short-Run Performance Persistence in Funds of Hedge Funds

In G. N. Gregoriou (Ed.), Reconsidering Funds of Hedge Funds: The Financial Crisis and Best Practices in UCITS, Tail Risk, Performance, and Due Diligence (pp. 289-301). Academic Press: Elsevier Inc., 2013

Posted: 15 Dec 2012 Last revised: 31 Jan 2013

See all articles by David Ardia

David Ardia

HEC Montreal - Department of Decision Sciences

Kris Boudt

Ghent University; Vrije Universiteit Brussel; Vrije Universiteit Amsterdam

Date Written: December 14, 2012

Abstract

There is extensive empirical evidence that funds of hedge funds (FoHFs) quickly change their investment bets as a function of the changing market conditions. In this chapter, we first analyze the stability of risk exposure and performance of FoHFs during the period January 2005-June 2011. We then study the short-run persistence of performance in the FoHFs industry. Past performance is measured using the 1-year trailing return as well as risk-adjusted measures such as the Sharpe ratio and the fund’s alpha based on the Carhart (1997) or Fung and Hsieh (2004) factor models. Over the examined timeframe, we consistently find that using risk-adjusted return measures improves the risk-adjusted performance of the momentum investment strategy. This finding holds for the financial crisis period as well as the pre- and post-crisis periods.

Keywords: Financial crisis, Fund of funds, Persistence, Return, Risk, Selection, Stability, Time-variation

JEL Classification: C12, C21, C22

Suggested Citation

Ardia, David and Boudt, Kris, The Short-Run Performance Persistence in Funds of Hedge Funds (December 14, 2012). In G. N. Gregoriou (Ed.), Reconsidering Funds of Hedge Funds: The Financial Crisis and Best Practices in UCITS, Tail Risk, Performance, and Due Diligence (pp. 289-301). Academic Press: Elsevier Inc., 2013, Available at SSRN: https://ssrn.com/abstract=2189533

David Ardia (Contact Author)

HEC Montreal - Department of Decision Sciences ( email )

3000 Côte-Sainte-Catherine Road
Montreal, QC H2S1L4
Canada

Kris Boudt

Ghent University ( email )

Sint-Pietersplein 5
Gent, 9000
Belgium

Vrije Universiteit Brussel ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

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