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Persistence in Hedge Fund Performance: The True Value of a Track Record

21 Pages Posted: 20 May 2002  

Harry M. Kat

Independent

Faye Menexe

University of Reading

Date Written: May 6, 2002

Abstract

In this paper we study the persistence and predictability of several statistical parameters of individual hedge fund returns. We find little evidence of persistence in mean returns but do find strong persistence in hedge funds' standard deviations and their correlation with the stock market. Persistence in skewness and kurtosis is low but this could be due to the small size of the sample used. Despite the observed persistence, our study also shows that in absolute terms hedge funds' risk profiles are not easily predicted from historical returns alone. The true value of a hedge fund's track record therefore appears not to lie in its use as a predictor of future performance and risk, but primarily in the insight that it provides in a fund's risk profile relative to that of other funds in the same strategy group. The availability of a track record is important, but for a different reason than many investors think.

JEL Classification: G10, G11

Suggested Citation

Kat, Harry M. and Menexe, Faye, Persistence in Hedge Fund Performance: The True Value of a Track Record (May 6, 2002). Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=311041 or http://dx.doi.org/10.2139/ssrn.311041

Harry M. Kat (Contact Author)

Independent

No Address Available

Faye Menexe

University of Reading ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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