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Multi-Period Performance PersistenceAnalysis of Hedge Funds

Published online by Cambridge University Press:  06 April 2009

Vikas Agarwal  and
Narayan Y. Naik
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Abstract

Since hedge funds specify significant lock-up periods,we investigate persistence in the performance ofhedge funds using a multi-period framework in whichthe likelihood of observing persistence by chance islower than in the traditional two-period framework.Under the null hypothesis of no manager skill (nopersistence), the theoretical distribution ofobserving wins or losses follows a binormialdistribution. We test this hypothesis using thetraditional two-period framework and compare thefindings with the results obtained using ourmulti-period framework. We examine whetherpersistence is sensitive to the length of returnmeasurement intervals by using quarterly,half-yearly and yearly returns. We find maximumpersistence at the quarterly horizon indicating thatpresistence among hedge fund managers is short termin nature.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 35 , Issue 3 , September 2000 , pp. 327 - 342
Copyright
Copyright © School of Business Administration, University of Washington 2000

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Footnotes

*

Both authors, London Business School, SussexPlace, Regent's Park, London NWI 4SA, U.K. Wethank Ravi Bansal, Stephen Brown (the editor),Jennifer Carpenter, Elroy Dimson, WilliamGoet-zmann (associate editor and referee), DavidHsieh, Frans de Roon, Henri Servaes, FauchierPartners Ltd., and participants at the hedge fundconference at Duke University and Issues inPerformance Measurement workshop at the EuropeanInstitute for Advanced Studies in Management,Brussels for many helpful comments andconstructive suggestions. Naik is grateful forfunding from Inquire U.K. and the EuropeanCommission's TMR program (network ref. ERBFMRXCT960054). Agarwal is grateful for financial supportfrom the British Council's Chevening scholorship,and the Edward Jones, Frank Russell, and FauchierPartners scholarships during the past three yearsin the Ph.D. pro-gram. We are gratful to BobPotsic of Hedge Fund Research Inc., Chicago forproviding the data. We are responsible for allerrors.

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