Relative Hedge Fund Skill and the Informativeness of Cohort Alpha

57 Pages Posted: 25 Jan 2018 Last revised: 9 Sep 2019

See all articles by David Forsberg

David Forsberg

Rozetta Institute

David R. Gallagher

Rozetta Institute

Geoff Warren

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics

Date Written: September 9, 2019

Abstract

We propose a cohort model that evaluates hedge funds against peers which execute similar investment strategies. The method improves the identification of skilled managers by addressing the omitted variable problem present in traditional factor models. The method can enhance the construction of hedge fund-of-funds portfolios through isolating unique style groupings as well as the best managers within each group. The model displays strong ability to explain hedge fund returns out-of-sample, with cohort alpha more persistent than alpha based on the seven-factor model. A hedge fund-of-funds analysis finds significant performance enhancement from exposure to the best funds within each cohort.

Keywords: hedge funds; peer groups; clustering; relative performance; performance persistence

JEL Classification: G23

Suggested Citation

Forsberg, David and Gallagher, David R. and Warren, Geoffrey J., Relative Hedge Fund Skill and the Informativeness of Cohort Alpha (September 9, 2019). Available at SSRN: https://ssrn.com/abstract=3104261 or http://dx.doi.org/10.2139/ssrn.3104261

David Forsberg

Rozetta Institute ( email )

Sydney

David R. Gallagher (Contact Author)

Rozetta Institute ( email )

Sydney

Geoffrey J. Warren

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics ( email )

CBE Building 26C
Kingsley Sreet, Acton
Canberra, ACT 0200
Australia

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