Only Winners in Tough Times Repeat: Hedge Fund Performance Persistence over Different Market Conditions

Zheng Sun, Ashley W. Wang and Lu Zheng

Journal of Financial and Quantitative Analysis, 2018, vol. 53, issue 5, 2199-2225

Abstract: We provide novel evidence that hedge fund performance is persistent following weak hedge fund markets but is not persistent following strong markets. Specifically, we construct two performance measures, RET_DOWN and RET_UP, conditioned on the level of overall hedge fund sector returns. After adjusting for risks, funds in the highest RET_DOWN quintile outperform funds in the lowest quintile by approximately 7% in the subsequent year, whereas funds with better RET_UP do not outperform subsequently. The RET_DOWN measure can predict future fund performance over a horizon as long as 3 years, for both winners and losers and for funds with few share restrictions.

Date: 2018
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