Predicting hedge fund performance when fund returns are skewed

Andrea J. Heuson, Mark C. Hutchinson, Alok Kumar

Research output: Contribution to journalArticle

Abstract

We show that fund-specific return skewness is associated with managerial skill and future hedge fund performance. Specifically, skewness in fund returns reflects managerial skill in avoiding large drawdowns. Using a new measure of investment skill that accounts for this managerial ability, we demonstrate that traditional performance measures underestimate (overestimate) managerial performance when returns exhibit positive (negative) fund-specific skewness. Our new measure is particularly valuable during periods of economic crisis, when the annual risk-adjusted outperformance is 5.5%.

Original languageEnglish (US)
JournalFinancial Management
DOIs
StateAccepted/In press - Jan 1 2019

Keywords

  • fund-specific skewness
  • G10
  • G19
  • G20
  • hedge funds
  • investment skill
  • performance measurement
  • performance persistence

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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