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A Panel Regression Approach to Holdings-Based Fund Performance Measures

Multiperiod performance persistence analysis of hedge funds

Wayne Ferson and Junbo L Wang

The Review of Asset Pricing Studies, 2021, vol. 11, issue 4, 695-734

Abstract: Portfolio performance measures using holdings data are panel regressions. The returns of a fund’s stocks are regressed on its lagged portfolio weights. Stock fixed effects isolate average performance from time-series predictive ability. Control variables condition for fund performance on the characteristics of the stocks held. The long-term performance of average holdings drives some of the classical measures, while predictive ability drives others. A “buy-and-hold drift,” where portfolio weights increase over time in the higher alpha stocks, affects performance measures. Investor flows respond to average performance net of the buy-and-hold drift. (JEL G11, G14, G23, G29).

Date: 2021
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