A Multi-Factor Performance Model: Evidence From the Hedge Fund Industry

Abstract

This article aims at testing empirically the major building blocks that affect the performance of different categories of hedge funds such as incentive fees, management fees, size, age, hurdle rate, high watermark provision and lockup period. We did not find performance persistence in the long-term due to the lockup period and incentive fees. Brown et al (1999) who studied the annual returns of offshore hedge funds found no persistence. We found that performance persistence among hedge fund managers is short-term using monthly returns. We have also divided the funds into deciles according to the status of the fund as looser or winner. We have found performance persistence over two consecutive periods. The categories of hedge funds that are examined are emerging markets, distressed securities, event driven, fixed income arbitrage, global macro, long/short equity and funds of funds. The sample is provided from Data Feeder data set. It is very comprehensive and includes hedge funds for the period 1998 to 2003. The database includes defunct funds and funds that ceased to operate and, therefore, is free from survivorship bias.