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Hedge Fund Performance and Manager Skill
Author(s) -
Edwards Franklin R.,
Caglayan Mustafa Onur
Publication year - 2001
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.2102
Subject(s) - hedge fund , fund of funds , returns based style analysis , open end fund , persistence (discontinuity) , investment style , performance fee , incentive , investment (military) , style analysis , economics , alternative beta , investment management , business , passive management , monetary economics , institutional investor , finance , fund administration , return on investment , microeconomics , law , engineering , corporate governance , open ended investment company , political science , geotechnical engineering , production (economics) , politics
Using data on the monthly returns of hedge funds during the period January 1990 to August 1998, we estimatesix‐factor Jensen alphas for individual hedge funds, employing eight different investment styles. We findthat about 25% of the hedge funds earn positive excess returns and that the frequency and magnitude offunds' excess returns differ markedly with investment style. Using six‐factor alphas as a measure ofperformance, we also analyze performance persistence over 1‐year and 2‐year horizons and findevidence of significant persistence among both winners and losers. These findings, together with our findingthat hedge funds that pay managers higher incentive fees also have higher excess returns, are consistent withthe view that fund manager skill may be a partial explanation for the positive excess returns earned by hedgefunds. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:1003–1028, 2001