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

The Journal of Portfolio Management

Posted: 10 May 2018 Last revised: 1 Nov 2021

See all articles by Chao Gao

Chao Gao

Australian National University, RSFAS

Tim Haight

Loyola Marymount University

Chengdong Yin

Renmin University of China - School of Finance

Chengsi Zhang

Renmin University of China - School of Finance

Date Written: June 7, 2020

Abstract

Our study examines the performance life cycle of hedge funds. Performance declines with age are
pervasive, not just for the average hedge fund, but also for past winners and for funds with
characteristics that predict cross-sectional fund returns. We examine several possible mechanisms
and we find that fund growth and decreasing performance incentives of fund managers contribute
to performance declines with age. Performance declines in early years coincide with a sharp drop
in strategy distinctiveness, which suggests that declines relate to the inability to maintain strategy
secrecy. 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? (June 7, 2020). The Journal of Portfolio Management, 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)

Renmin University of China - School of Finance ( email )

Ming De Main Building
Renmin University of China
Beijing, Beijing 100872
China

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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