Do hedge funds deliver alpha? A Bayesian and bootstrap analysis

By Robert Kosowski, Narayan Naik, Melvyn Teo. 2007

495 citations recorded by the source corpus.

Using a robust bootstrap procedure, we find that top hedge fund performance cannot be explained by luck, and that hedge fund performance persists at annual horizons. Moreover, we show that Bayesian measures, which help overcome the short-sample problem inherent in hedge fund returns, lead to superior performance predictability. Relative to sorting on OLS alphas, sorting on Bayesian alphas yields a 5.5 percent per year increase in the alpha of the spread between the top and bottom hedge fund deciles. Our results are robust, and relevant to investors, as they are neither confined to small funds, nor driven by incubation bias, backfill bias or serial correlation.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/bce3e26c268c38f9e3a0333057527c63e0b13c94

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Citations in the corpus

Hedge Funds, Managerial Skill, and Macroeconomic Variables (2011, background): “Kosowski, Naik, and Teo (2007) demonstrate, using a bootstrap approach, that the alpha of the top hedge funds cannot be explained by luck or sample variability.”
Do Hot Hands Exist Among Hedge Fund Managers? An Empirical Evaluation (2006, unknown): “Kosowski, Naik, and Teo (2007) used a seven-factor model and applied a bootstrap procedure, as well as Bayesian measures to estimate hedge fund performance.”
Higher Risk, Lower Returns: What Hedge Fund Investors Really Earn (2011, unknown): “Many studies find that hedge funds earn positive alpha on the magnitude of 3 to 5 percent, e.g., Ibbotson and Chen (2006), Kosowski, Naik, and Teo (2007) and Brown, Goetzmann, and Ibbotson (1999).”
Systematic Risk and the Cross-Section of Hedge Fund Returns (2012, unknown): “…significantly positive aggregate alpha in the hedge funds market (e.g., Brown, Goetzmann, and Ibbotson (1999), Ackermann, McEnally, and Ravenscraft (1999), Liang (1999), Agarwal and Naik (2000), Fung and Hsieh (2004), Kosowski, Naik, and Teo (2007), and Fung, Hsieh, Naik, and Ramadorai (2008)).”
Macroeconomic Risk and Hedge Fund Returns (2014, background): “…returns of all individual hedge funds in their sample and report a back-fill bias estimate of 1.4% per annum (see also Malkiel and Saha (2005) and Kosowski, Naik, and Teo (2007) for previous literature on back-fill bias and how they adjust their samples to mitigate the impact of back-fill bias…”