The performance persistence of equity longshort hedge funds

Abstract

This paper examines the persistence of raw and risk-adjusted returns for equity longshort hedge funds using the portfolio approach of Hendricks et al Only limited evidence of persistence is found for raw returns. Funds with the highest raw returns last year continue to outperform over the subsequent year, although not significantly, while there is no persistence in returns beyond 1 year. In contrast, we find performance persistence based on risk-adjusted return measures such as the Sharpe Ratio and in particular an alpha from a multifactor model. Funds with the highest risk-adjusted performance continue to significantly outperform in the following year. The persistence does not last longer than 1 year except for the worst performers. Funds with significant risk-adjusted returns show less exposure to the market and have high raw returns and low volatility. These results are robust to adjustments for stale prices and sub-period analysis. © 2009 Palgrave Macmillan.