Persistence in hedge fund performance in bull and bear markets : a multi periods analysis

Abstract: This dissertation investigates the persistence in the performance of hedge funds over the period of 19 years starting from January 1995 to March 2014. Aggregate monthly returns data of more than 6500 hedge funds from around the globe published by the Hedge Fund Research group are considered as a representative sample of hedge fund industry. The aim of the study is to investigate whether hedge fund managers have genuine skills to outperform the market during different economic cycles. For that purpose, we divide the sample period into 4 sub-samples that are characterised by different market trends. A skilled hedge fund manager is defined by his ability to outperform the market consistently during two consecutive sub-sample periods. In order to identify managerial skills in hedge funds, we make use of both linear and quadratic capital asset pricing models (CAPM) and distinguish between outperformance, selectivity and timing skill. We define the outperformance skill as the ability of a fund manager to generally outperform the market. Selectivity skill is defined as the ability to select outperforming assets that will help the manager to outperform the market. In contrast, market timing skill is defined as the ability to get in and out of the market in time in order to either avoid more losses or make large profit. The multi-period framework is carried out using three different techniques: Contingence table, Chi-square statistic test and the Kolmogorov-Smirnov test. And we extend the analysis on whether the explanatories variables (factor loadings) can capture the variability of hedge fund excess return regardless the business cycle. The results obtained from both methods of performance reveal that hedge fund managers have genuine skills to outperform the market return during good market conditions due to their selectivity skill. We find not statistically evidence of hedge funds market timing skill during the four sub-sample periods. The persistence analysis using the Cross-product ratio and Chi-square test reveals that in the long run hedge funds are not able to outperform the market consistently during all four sub-sample periods. We find evidence that the four-factor model produces robust results compared to the CAPM and the three-factor model, as represented by a higher R-square. However, we find evidence of significant performance under the Kolmogorov-Smirnov test. The significant performance is due to Equity Hedge (EH), Even Driven (ED), Emerging Market (EM), Fund Weighted Composite (FWC) and Relative Value (RV) strategies during the...M.Com. (Financial Economics