Hedge Fund Performance Persistence: A new Approach
by Nicole Boyson
Financial Analyst Journal Vol. 64, No. 6 Nov/Dec 2008
pp. 27 – 44
Basic theme: if hedge funds have high Fung and Hsieh 7 factor alpha (or information ratio, t-stat of alpha, based on stationary bootstrap) in the past, they will have it in the future, especially for young and small funds. The author shows size and age of the hedge fund matters to its performance persistence. That is it is hard for an old and large hedge fund to have high alpha or information ratio all the time. As fund grow older, good performers attract more capital thus they grow in size but more capital also limit their capacity in generating alpha due to higher transaction cost, higher price impact and management capacity limit.