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Hedge Fund Performance and Manager Skill

Posted: 2 Oct 2001  

Franklin R. Edwards

Columbia Business School - Finance and Economics

Mustafa Onur Caglayan

Ozyegin University

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Abstract

Using data on the monthly returns of hedge funds during the period 1990:01 through 1998:08, we estimate six-factor Jensen alphas for individual hedge funds employing eight different investment styles. We find that about 25 percent of hedge funds earn positive excess returns, and that the frequency and magnitude of funds' excess returns differ markedly by investment style. Using six-factor alphas as a measure of performance, we also analyze performance persistence over one- and two-year horizons and find evidence of significant persistence among both winners and losers. These findings together with our finding that hedge funds that pay managers higher incentive fees also have higher excess returns are consistent with the view that fund manager skill may be a partial explanation for the positive excess returns earned by hedge funds.

Keywords: Hedge Funds, Hedge Fund Performance, Manager Skill

JEL Classification: G11, G23, G29

Suggested Citation

Edwards, Franklin R. and Caglayan, Mustafa Onur, Hedge Fund Performance and Manager Skill. Journal of Futures Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=282652

Franklin Edwards (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

Mustafa Onur Caglayan

Ozyegin University ( email )

Nisantepe Mahallesi Orman Sokak
No:34-36 Alemdag Cekmekoy
Istanbul, 34794
Turkey
+90-216-564-9518 (Phone)

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