Only Winners in Tough Times Repeat: Hedge Fund Performance Persistence Over Different Market Conditions

42 Pages Posted: 20 Apr 2016

See all articles by Zheng Sun

Zheng Sun

University of California, Irvine - Paul Merage School of Business

Ashley Wang

Board of Governors of the Federal Reserve System

Lu Zheng

University of California, Irvine - Paul Merage School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: 2016-03

Abstract

We provide novel evidence that hedge fund performance is persistent following weak hedge fund markets, but is not persistent following strong markets. Specifically, we construct two performance measures, DownsideReturns and UpsideReturns, conditioned on the level of overall hedge fund sector returns. After adjusting for risks, funds in the highest DownsideReturns quintile outperform funds in the lowest quintile by about 7% in the subsequent year, whereas funds with better UpsideReturns do not outperform subsequently. The DownsideReturns can predict future fund performance over a horizon as long as 3 years, for both winners and losers, and for funds with few share restrictions.

Keywords: Conditional performance, Hedge funds, Performance Persistence

JEL Classification: G10, G23

Suggested Citation

Sun, Zheng and Wang, Ashley and Zheng, Lu, Only Winners in Tough Times Repeat: Hedge Fund Performance Persistence Over Different Market Conditions (2016-03). FEDS Working Paper No. 2016-030, Available at SSRN: https://ssrn.com/abstract=2767362 or http://dx.doi.org/10.17016/FEDS.2016.030

Zheng Sun (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States

Ashley Wang

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Lu Zheng

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
9498248365 (Phone)

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