Hedge Fund Performance Persistence: A New Approach

Recent literature has found some evidence of performance persistence in hedge finds. This study investigated whether this persistence varies with fund characteristics, such assize and age. Previous research has found that funds face capacity constraints, that investment flows chase past performance, and that as funds age, they become more passively managed, which reduces the likelihood of performance persistence as fiends grow older and larger. Consistent with this model, this study found that performance persistence is strongest among small, young funds. A portfolio of these funds with prior good performance outperformed a portfolio of large, mature finds with prior poor performance by 9.6 percent per year.