Hedge Fund Performance Persistence over Different Market Conditions
نویسندگان
چکیده
We provide novel evidence that hedge fund performance is persistent following periods of relative hedge fund market weakness, but not following periods of relative market strength. Specifically, we construct two performance measures, DownsideReturns and UpsideReturns, conditioning on whether the overall hedge fund market return is below or above its sample median. After adjusting for risk and fund characteristics, funds in the highest DownsideReturns quintile outperform funds in the lowest quintile by 5% in the subsequent year, whereas funds with better UpsideReturns do not outperform subsequently. These findings suggest an error-inmeasurement problem embedded in the unconditional average historical hedge fund returns, which, in turn, weakens their performance predictability.
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