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Persistence of Hedge Fund Returns and Fee-Aware Portfolio Construction

Alexander Rudin
The Journal of Portfolio Management Spring 2018, 44 (5) 103-112; DOI: https://doi.org/10.3905/jpm.2018.44.5.103
Alexander Rudin
is managing director at State Street Global Advisors in Stamford, CT
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Abstract

The author presents an empirical study of the persistence of manager returns for two core hedge fund categories: equity long–short and macro/managed futures. The author finds that although beta to core risk factors and volatility of excess returns were indeed persistent over time for these strategies, it appeared to be difficult to reliably predict outperformance of one fund over another based on past results. The author suggests portfolio construction assumptions that are consistent with these empirical findings and incorporate another feature of hedge fund performance that is highly persistent: manager fees. The author believes that the suggested portfolio construction process offers several advantages for institutional investors: It is robust because it is anchored in those properties of hedge fund historical returns that are persistent, and it allows incorporation of active views and hedge fund manager fees into portfolio decisions in a transparent and consistent manner.

TOPICS: Real assets/alternative investments/private equity, manager selection, performance measurement

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The Journal of Portfolio Management: 44 (5)
The Journal of Portfolio Management
Vol. 44, Issue 5
Spring 2018
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Persistence of Hedge Fund Returns and Fee-Aware Portfolio Construction
Alexander Rudin
The Journal of Portfolio Management Apr 2018, 44 (5) 103-112; DOI: 10.3905/jpm.2018.44.5.103

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Persistence of Hedge Fund Returns and Fee-Aware Portfolio Construction
Alexander Rudin
The Journal of Portfolio Management Apr 2018, 44 (5) 103-112; DOI: 10.3905/jpm.2018.44.5.103
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  • Article
    • Abstract
    • PERSISTENCE OF INDIVIDUAL HEDGE FUND RETURNS
    • THE MOST PERSISTENT FEATURE OF HEDGE FUND RETURNS—FEES
    • FEE-AWARE PORTFOLIO CONSTRUCTION
    • CONCLUDING REMARKS
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)

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