The Performance Life Cycle of Hedge Funds: Can Investors Achieve Lasting Performance?

86 Pages Posted: 10 May 2018 Last revised: 26 Oct 2019

See all articles by Chao Gao

Chao Gao

Australian National University, RSFAS

Tim Haight

Loyola Marymount University

Chengdong Yin

Purdue University - Krannert School of Management

Chengsi Zhang

Renmin University of China - School of Finance

Date Written: September 26, 2019

Abstract

We examine the performance life cycle of hedge funds. Performance declines with age are pervasive, not just for the average fund, but also for past winners and for funds with characteristics that predict cross-sectional returns. Fund growth and decreasing performance incentives appear to contribute to performance declines with age. Performance declines in early years coincide with a sharp drop in strategy distinctiveness. Horse racing analysis suggests that investors can exploit life cycle mechanisms, as portfolios of funds that are small and that have strong performance incentives (regardless of age) deliver superior performance with greater consistency than even past winners do.

Keywords: Hedge Funds, Performance Life Cycle, Fund Size, Performance Incentives, Strategy Distinctiveness

JEL Classification: G20, G23, G29

Suggested Citation

Gao, Chao and Haight, Tim and Yin, Chengdong and Zhang, Chengsi, The Performance Life Cycle of Hedge Funds: Can Investors Achieve Lasting Performance? (September 26, 2019). Available at SSRN: https://ssrn.com/abstract=3169312

Chao Gao

Australian National University, RSFAS ( email )

CBE Building
26C Kingsley Street
Acton, 2601
Australia

Tim Haight

Loyola Marymount University ( email )

7900 Loyola Boulevard
Los Angeles, CA 90045
United States

Chengdong Yin (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Chengsi Zhang

Renmin University of China - School of Finance ( email )

Room B906, Xianjin Builidng
Renmin University of China
Beijing, 100872
China

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