Publication Type

Journal Article

Version

Postprint

Publication Date

4-2007

Abstract

Using a robust bootstrap procedure, we find that top hedge fund performance cannot be explained by luck, and that hedge fund performance persists at annual horizons. Moreover, we show that Bayesian measures, which help overcome the short-sample problem inherent in hedge fund returns, lead to superior performance predictability. Relative to sorting on OLS alphas, sorting on Bayesian alphas yields a 5.5 percent per year increase in the alpha of the spread between the top and bottom hedge fund deciles. Our results are robust, and relevant to investors, as they are neither confined to small funds, nor driven by incubation bias, backfill bias or serial correlation.

Keywords

Hedge Funds, Performance, Alpha, Factor models, Bayesian, Bootstrap

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Publication

Journal of Financial Economics

Issue

1

First Page

229-264

ISSN

0304-405X

Identifier

10.1016/j.jfineco.2005.12.009

Publisher

Elsevier

Share

COinS