Do Hedge Funds Deliver Alpha? A Bayesian and Bootstrap Analysis

47 Pages Posted: 1 Nov 2005

See all articles by Robert Kosowski

Robert Kosowski

Imperial College Business School; CEPR (Centre for Economic Policy Research); University of Oxford, Oxford-Man Institute of Quantitative Finance; Unigestion UK

Narayan Y. Naik

London Business School - Institute of Finance and Accounting

Melvyn Teo

Singapore Management University - Lee Kong Chian School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 2005

Abstract

Using a robust bootstrap procedure, we find that top hedge fund performance cannot be explained by luck, and that hedge fund performance persists at annual horizons. Moreover, we show that Bayesian measures, which help overcome the short-sample problem inherent in hedge fund returns, lead to superior performance predictability. Relative to sorting on OLS alphas, sorting on Bayesian alphas yields a 5.5 percent per year increase in the alpha of the spread between the top and bottom hedge fund deciles. Our results are robust, and relevant to investors, as they are neither confined to small funds, nor driven by incubation bias, backfill bias or serial correlation.

Keywords: hedge fund, persistence, Bayesian, alpha, backfill, incubation, bootstrap

Suggested Citation

Kosowski, Robert and Naik, Narayan Y. and Teo, Melvyn, Do Hedge Funds Deliver Alpha? A Bayesian and Bootstrap Analysis (December 2005). Available at SSRN: https://ssrn.com/abstract=829025 or http://dx.doi.org/10.2139/ssrn.829025

Robert Kosowski

Imperial College Business School ( email )

South Kensington Campus
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United Kingdom
+442075943294 (Phone)

HOME PAGE: http://www3.imperial.ac.uk/people/r.kosowski

CEPR (Centre for Economic Policy Research) ( email )

London
United Kingdom

HOME PAGE: http://www.cepr.org/

University of Oxford, Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
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Unigestion UK

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United Kingdom

Narayan Y. Naik (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 (Phone)
+44 20 724 3317 (Fax)

Melvyn Teo

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
+65 6828 0735 (Phone)
+65 6822 0777 (Fax)

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