Predicting hedge fund performance when fund returns are skewed

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

doi:10.1111/fima.12304

Predicting hedge fund performance when fund returns are skewed

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

Finance

Research output: Contribution to journal › Article › peer-review

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 language	English (US)
Pages (from-to)	877-896
Number of pages	20
Journal	Financial Management
Volume	49
Issue number	4
DOIs	https://doi.org/10.1111/fima.12304
State	Published - Dec 1 2020

Keywords

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

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics

Access to Document

10.1111/fima.12304

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title = "Predicting hedge fund performance when fund returns are skewed",

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%.",

keywords = "G10, G19, G20, fund-specific skewness, hedge funds, investment skill, performance measurement, performance persistence",

author = "Heuson, {Andrea J.} and Hutchinson, {Mark C.} and Alok Kumar",

note = "Funding Information: We are grateful to an anonymous referee, Vikas Agarwal, Sandro Andrade, Brad Barber, Indraneel Chakraborty, Liam Gallagher, Mila Getmansky‐Sherman, Bing Han (Editor), Kyung‐So Im, Bing Liang, Narayan Naik, and Richard Taffler for helpful comments. Mark Hutchinson is grateful for financial support from the Science Foundation Ireland under grant number 18/SPP/3459. All remaining errors and omissions are ours. ",

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AU - Heuson, Andrea J.

AU - Hutchinson, Mark C.

AU - Kumar, Alok

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PY - 2020/12/1

Y1 - 2020/12/1

N2 - 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%.

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KW - hedge funds

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KW - performance measurement

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