Predicting Hedge Fund Performance When Fund Returns Are Skewed
40 Pages Posted: 12 Jun 2014 Last revised: 20 Oct 2019
Date Written: October 1, 2019
Abstract
We show that fund-specific return skewness is associated with managerial skill and future hedge fund performance. Specifically, skewness in fund returns reflects managerial skill in avoiding large drawdowns. Using a new measure of investment skill that accounts for this managerial ability, we demonstrate that traditional performance measures under-estimate (over-estimate) managerial performance when returns exhibit positive (negative) fund-specific skewness. Our new measure is particularly valuable during periods of economic crisis, when the annual risk-adjusted out-performance is 5.5%.
Keywords: Performance measurement, hedge funds, fund-specific skewness, performance
JEL Classification: G10, G19, G20
Suggested Citation: Suggested Citation