Good article from FAJ on hedge fund performance persistence.
Abstract:
Recent literature has found some evidence of performance persistence in hedge funds. This study
investigated whether this persistence varies with fund characteristics, such as size 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 funds 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 funds with
prior poor performance by 9.6 percent per year.
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