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Only Winners in Tough Times Repeat: Hedge Fund Performance Persistence over Different Market Conditions

Published online by Cambridge University Press:  20 August 2018

Zheng Sun ,
Ashley W. Wang  and
Lu Zheng
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Abstract

We provide novel evidence that hedge fund performance is persistent following weak hedge fund markets but is not persistent following strong markets. Specifically, we construct two performance measures, RET_DOWN and RET_UP, conditioned on the level of overall hedge fund sector returns. After adjusting for risks, funds in the highest RET_DOWN quintile outperform funds in the lowest quintile by approximately 7% in the subsequent year, whereas funds with better RET_UP do not outperform subsequently. The RET_DOWN measure can predict future fund performance over a horizon as long as 3 years, for both winners and losers and for funds with few share restrictions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 5 , October 2018 , pp. 2199 - 2225
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

The views presented here are solely those of the authors and do not represent those of the Federal Reserve Board or its staff. We thank George Aragon, Turan Bali, Michael Brennan, Stephen Brown (the editor), Charles Cao (the referee), Yong Chen, Bing Liang, Cristian Tiu, and seminar participants at Aoyama Gakuin University, Bank de France, Bank of England, the 2013 Borsa Istanbul Finance and Economics Conference (BIFEC), Cheung Kong Graduate School of Business, Federal Reserve Board, Frankfurt School of Finance and Management, George Mason University, Hong Kong Polytechnic University, Hong Kong University, the 2014 International Finance and Banking Society (IFABS) Conference, Shanghai Advanced Institute of Finance (SAIF), Tsinghua University, University of California at Irvine, and University of Massachusetts Amherst.

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