Do Hot Hands Exist among Hedge Fund Managers? An Empirical Evaluation





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    • Ravi Jagannathan is from Kellogg School of Management at Northwestern University and the National Bureau of Economic Research, Alexey Malakhov is from Sam M. Walton College of Business at the University of Arkansas, and Dmitry Novikov is from J.P. Morgan. We would like to thank Vikas Agarwal, Dmitri Alexeev, Torben Andersen, Duke Bristow, Art Bushonville, Bhagwan Chowdhry, Randolph Cohen, Kent Daniel, Harry DeAngelo, Dobrislav Dobrev, Shingo Goto, David Hsieh, Ken Judd, Robert Korajczyk, Ken Kroner, Ananth Madhavan, Rosa Matzkin, Narayan Naik, Todd Pulvino, Bryan Routledge, Che-Lin Su, Melvyn Teo, Sergey Tsyplakov, and Motohiro Yogo; participants in the 2006 NBER Asset Pricing Program Meeting, 2006 Western Finance Association Meeting, 2007 American Finance Association Meeting, and 2007 Advances in Theory Based Estimation: A Conference in Honor of Lars Hansen and Ken Singleton; and seminar participants at Barclays Global Investors, China Europe International Business School, East Carolina University, Georgia State University, Indian School of Business, National University of Singapore, Northwestern University, Oklahoma State University, Singapore Management University, University of Arkansas, University of Illinois at Urbana-Champaign, University of Melbourne, University of New South Wales, University of North Carolina at Chapel Hill, University of South Carolina, University of Southern California, and York University for their helpful discussions and suggestions. We are grateful to the editor, Robert F. Stambaugh, and an anonymous referee for their valuable suggestions. We are also grateful to Hedge Fund Research, Inc. for providing us with the data. Alexey Malakhov gratefully acknowledges summer research funding from Sam M. Walton College of Business. Any views expressed in this paper are those of the authors and not necessarily those of the institutions they represent.


In measuring performance persistence, we use hedge fund style benchmarks. This allows us to identify managers with valuable skills, and also to control for option-like features inherent in returns from hedge fund strategies. We take into account the possibility that reported asset values may be based on stale prices. We develop a statistical model that relates a hedge fund's performance to its decision to liquidate or close in order to infer the performance of a hedge fund that left the database. Although we find significant performance persistence among superior funds, we find little evidence of persistence among inferior funds.