The Performance Life Cycle of Hedge Funds: Can Investors Achieve Lasting Performance?
86 Pages Posted: 10 May 2018 Last revised: 26 Oct 2019
Date Written: September 26, 2019
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: Suggested Citation