We thank John Doukas (the editor), Günter Franke, Ferdinand Graf, Daniel Hoechle, Jens Jackwerth, Samuel Manser, Paul Söderlind, Evert Wipplinger, an anonymous referee, the participants of the Man Investments Quant Forum at St. Anne's College in Oxford, and the participants of the joint research workshop of the University of St. Gallen and the University of Konstanz for their valuable comments.
Hedge Fund Characteristics and Performance Persistence
Article first published online: 6 MAR 2013
© 2010 Blackwell Publishing Ltd
European Financial Management
Volume 19, Issue 2, pages 209–250, March 2013
How to Cite
Ammann, M., Huber, O. and Schmid, M. (2013), Hedge Fund Characteristics and Performance Persistence. European Financial Management, 19: 209–250. doi: 10.1111/j.1468-036X.2012.00574.x
- Issue published online: 6 MAR 2013
- Article first published online: 6 MAR 2013
- hedge funds;
- factor models;
- performance persistence
In this paper, we investigate the performance persistence of hedge funds over time horizons between 6 and 36 months based on a merged sample from the Lipper/TASS and CISDM databases for the time period from 1994 to 2008. Unlike previous literature, we use a panel probit regression approach to identify fund characteristics that are significantly related to performance persistence. We then investigate the performance of two-way sorted portfolios where sorting is based on past performance and one of the additional fund characteristics identified as persistence-enhancing in the probit analysis. We find statistically and economically significant performance persistence for time horizons of up to 36 months. Although we identify several fund characteristics that are strongly correlated with the probability of observing performance persistence, we find only one fund characteristic, a strategy distinctiveness index that attempts to measure manager skills and the uniqueness of the hedge fund's trading strategies, to have the ability to systematically improve performance persistence up to a time horizon of 24 months. The economic magnitude of this improvement amounts to a sizeable increase in alpha by approximately 4.0% and 2.3% p.a. for annual and biennial rebalancing, respectively.