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The Journal of Portfolio Management

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Identifying Performance Persistence in Hedge Funds Using a Measure of Manager Skill

Arik Ben Dor, Jingling Guan and Xiaming Zeng
The Journal of Portfolio Management Manager Fund Selection 2020, jpm.2020.1.139; DOI: https://doi.org/10.3905/jpm.2020.1.139
Arik Ben Dor
is a managing director in the Quantitative Portfolio Strategy Group at Barclays in New York, NY
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Jingling Guan
is a director in the Quantitative Portfolio Strategy Group at Barclays in New York, NY
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Xiaming Zeng
is a vice president in the Quantitative Portfolio Strategy Group at Barclays in London, United Kingdom
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Abstract

In this article, the authors discuss the challenges in identifying performance persistence among hedge funds and introduce a novel measure of manager skill, termed MMS, to address them. Funds with higher MMS scores deliver larger returns with lower volatilities, better tail-risk behavior, and less liquidation risk in subsequent periods than funds with lower MMS scores. The results cannot be explained by differences in fund characteristics or market exposures and are robust to the choice of rebalancing frequency and the existence of backfill bias.

TOPICS: Manager selection, performance measurement

Key Findings

  • • The authors introduce a novel measure of skill and demonstrate it is capable of differentiating among hedge funds based on their past performances.

  • • Funds with better skill generate subsequently both higher returns and improved risk properties.

  • • The results cannot be explained by differences in fund characteristics or market exposures and are robust to the choice of rebalancing frequency and the existence of backfill bias.

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The Journal of Portfolio Management: 49 (3)
The Journal of Portfolio Management
Vol. 49, Issue 3
February 2023
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Identifying Performance Persistence in Hedge Funds Using a Measure of Manager Skill
Arik Ben Dor, Jingling Guan, Xiaming Zeng
The Journal of Portfolio Management Feb 2020, jpm.2020.1.139; DOI: 10.3905/jpm.2020.1.139

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Identifying Performance Persistence in Hedge Funds Using a Measure of Manager Skill
Arik Ben Dor, Jingling Guan, Xiaming Zeng
The Journal of Portfolio Management Feb 2020, jpm.2020.1.139; DOI: 10.3905/jpm.2020.1.139
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  • Article
    • Abstract
    • PERFORMANCE PERSISTENCE: DISCUSSION AND ILLUSTRATION
    • MEASURE OF MANAGER SKILL
    • CONCLUSION
    • ADDITIONAL READING
    • ENDNOTES
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