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Luck or skill: What drives hedge fund performance persistence?

Written By: Ekaterina Ipatova, Mamata Parhi, Tapas Mishra, Kaizad Doctor   Abstract   This paper produces multiple fund-of-funds’ portfolios based on sorting and a novel nonparametric approach to lend in-depth insights into the extent hedge fund returns display higher order (non-linear) persistence patterns. By exploiting monthly data from Hedge Fund Research Database between 1999:1 to 2015:12, an out-of sample exercise provides robust evidence of performance persistence over the time horizon. However, up to 80% of hedge funds appear to be ‘lucky’ performers, confirmed upon undertaking a battery of robustness measures. We name those ‘lucky’ hedge funds, which pass the classical persistence selection procedure and are selected ‘by accident’ with regard to funds with persistent returns. We argue that these funds are unlikely to experience significant outperformance in the future. Our non-parametric identification mechanism allows for a reduced number of persistent funds, enabling practitioners to focus on a few with meaningful qualitative scrutiny. Moreover, we expand the debate in the literature by analysing post-crisis data and demonstrating that after the 2008 crisis, the proportion of genuinely persistent funds got significantly reduced.…

Retail Hedge Funds

Written By: Andrew J. Sinclair, Chuyi Zhang   Abstract   We use a novel fund-level measure to identify 877 retail hedge funds. On average, retail funds do not underperform, either on an absolute basis or relative to institutional funds. In the cross-section, 14.3% of retail funds produce positive alpha and performance is predictable: funds with low systematic risk outperform, and poor performing funds persistently underperform. Turning to investor behavior, retail investors are “hot money” and are more likely to divest following poor performance. They do not exhibit selection ability but are not “dumb money,” and they also chase alpha and ignore (or avoid) common factor returns.…

2022 Survey Of The Top 50 Hedge Funds: Mid-Year Update

A First Half Of Historic Divergence   July brought some relief: a market rally, a soaring jobs report, and inflation numbers that didn’t accelerate as commodity prices continued their decline. This may suggest to some investors we’re past the worst of the bear market. But inflation remains stubbornly high, rising interest rates are threatening recession, food and energy insecurity are growing more acute, and serious supply chain issues remain. Somewhat forgotten: The tragic six-month Russian war against Ukraine shows no signs of letting up, exacerbating macroeconomic and security problems and raising geopolitical tensions. All of this has contributed to one of the market's worst first-half starts since the Great Depression. More remarkable that the Top 50 Hedge Funds ended the first half of 2022 in the black, outpacing the market by 21 percentage points.…

2022 Survey of the Top 50 Hedge Funds

Hedge Fund Investing During a Time of War   Like the 2020 edition, this year’s survey collides with a seismic event — a geopolitical shock wrapped around soaring inflation, rising interest rates, and weakened supply chains. Several key takeaways: Over the past five years through 2021, the Top 50 hedge funds collectively generated net annualized returns that trailed a red-hot S&P 500 by just several percentage points, but did so with significantly less risk. The group’s largely uncorrelated returns produced a 5-year Sharpe Ratio that was more than 60 bps higher than the market. Equity, multistrategy, and credit funds led the way, and nearly half of the Top 50 were smaller funds, managing less than $1 billion. As was shown in the 2020 survey, the current Top 50 funds have again preserved capital better than the S&P 500 during the first quarter drawdown. They delivered positive returns, having outpaced a declining market by more than 7 percentage points through March. This year’s survey includes interviews with leading managers and allocators from Citadel, Amundi, Generali, EFG International, NS Partners, along with six hedge fund managers who made this year’s Top 50.…

2021 Global Survey of the Top 50 Hedge Funds: Q4 Update

Fourth Quarter Market and Performance Update The S&P 500 soared nearly 29% in 2021, nearly half of which was generated just in the 4th quarter in spite of clear threats to growth. It was during these last 3 months of the year when the gap between the index and the Top 50 Hedge Funds drastically expanded from nearly 5% to more than 18%. While most of the 50 sustained their historical annualized returns, two basic factors drove last year’s performance gap. One: the 10 largest contributors to the S&P 500’s returns were responsible for more than one-third of the index’s total gains. Two: the reversal in fortunes suffered by a handful of veteran hedged equity and global macro managers who had a long history of consistent solid returns. This report will explore why this occurred. Note: two thirds of the 4th-quarter gains linked to the index's top contributors’ were lost during the first 7 weeks of 2022 —before Russia invaded Ukraine.…

2021 Hedge Fund Survey - Q3 Update

Third quarter volatility ended up sending many trends sideways, leaving the market and the hedge fund industry flat for the period. Meanwhile, hedged equity, macro, and emerging market managers helped the Top 50 funds add nearly two full percentage points during the quarter. This select group outperformed the BarclayHedge average hedge fund return by 2.3% through the first 9 months of 2021, narrowing the amount by which it trails the market.…

Hedge Fund Manager Survey: More than 4 in 10 Managers Consider ESG Factors in Equity Selection; ESG Impact on Allocations Expected to Grow in the Year Ahead

Fewer than half of hedge fund managers currently consider environmental, social and governance (ESG) factors when selecting equity securities for their portfolios. But, of those that do take ESG into account, ESG ratings factored in the inclusion of more than half the assets currently in their portfolios. The significant role ESG ratings play in a significant number of investment decisions is the key takeaway from the latest Barclay Hedge Fund Manager Survey, a quarterly report on the sentiments of professionals in the alternative investments sector. Other significant findings include: Hedge Fund Managers who consider ESG factors in their investments will allocate well over half their assets next year based on ESG rankings. Most managers using ESG ratings do so to screen candidates for both Long and Short positions. Governance is the factor weighed most heavily by those managers using ESG scores. On average, managers considering ESG factors in their investments have been doing so for nearly six years. Here are the survey’s detailed findings about hedge fund managers’ consideration of ESG factors:   Q1: Do you currently take ESG factors into consideration when selecting equity securities for portfolio inclusion?   Q2: How long have you been taking ESG factors into consideration when making an investment? On average, managers considering ESG factors in equity investment decisions have been doing so for 57 months. Survey respondents included managers who’ve just begun considering ESG factors to many who’ve applied them to investment decisions for more than eight years. While the concept of “socially responsible investment” has a longer history, the introduction of considering more specific environmental, social and governance factors in investment decisions dates to the early 2000s.   Q3: What percent of your assets are currently allocated based on ESG ratings? Of those considering ESG factors in equity investment decisions, on average 52% of assets are currently allocated based on ESG ratings. Among those surveyed, 41% of respondents indicated that ESG ratings factored into 100% of their asset allocations. While several of those who indicated ESG ratings factored in 100% of their allocations are also among those who’ve been considering ESG factors the longest, there were some managers who’ve considered ESG ratings only recently. Clearly, they’ve decided to go all-in with their ESG-based investment strategies from the start.   Q4: What percent of your assets did you allocate last year based on ESG ratings? On average, among those considering ESG factors, 42% of last year’s asset allocations were based on ESG ratings. Responses ranged from 0% of allocations to the several respondents indicating they allocated 100% of assets based on ESG ratings. It would be interesting to see if the average increases in coming years, and whether more hedge fund managers reach the 100% allocation rate.   Q5: What percent of your assets do you anticipate allocating next year based on ESG ratings? In fact, respondents’ allocation plans for next year indicate that the percentage of equity investments based on ESG ratings is likely to increase. Respondents indicated that on average 58% of next year’s allocations will be based on ESG factors, a significant increase from last year’s 42%. The trend is consistent with reports that ESG investing grew at record levels during this year’s first quarter.   Q6: If you are using ESG considerations in your security selection process, how are you implementing those considerations? Of those employing ESG factors in their security selection process, a considerable majority – 61.5% — do so to screen candidates for both Long and Short positions. Slightly more than a third – 38.5% — do so solely to screen candidates for Long positions. No respondents reported using ESG factors solely to screen candidates for Short positions.   Q7: If you use ESG scores for selecting Short candidates, which ESG factors do you weigh most heavily? Governance is far and away the ESG factor weighed most heavily by investors considering Short candidates. Of those surveyed, 61.1% chose governance as the most significant ESG criteria in considering Short candidates, while 27.8% said they weigh environmental factors most heavily and 11.1% said sustainability was their top consideration. This is another finding that probably shouldn’t be surprising given the positive correlation studies have shown between governance and company performance.   Q8: If you use ESG scores for selecting Long candidates, which ESG factor do you weigh most heavily? While the emphasis remains on governance for most investors viewing Long candidates through an ESG lens, the percentage is slightly less than for Short candidates at 55.6%. The emphasis on environmental factors also is somewhat less in considering Long candidates at 18.5%. The difference is in the consideration of social sustainability factors, 25.8% for Long candidates. The larger emphasis on the “S” in ESG for Long candidates may well reflect growing investor recognition of the value of intangible assets like brand or customer loyalty – and how easily the value of those assets can be eroded through reputation-damaging human capital or supply chain events or other negative social factors.   Q9: Several firms publish ESG ratings/scores. Which publisher is your preferred provider? Survey respondents indicated a preference for four sources of ESG ratings and scores. Bloomberg and Sustainanalytics led the way, each favored by one-third of those surveyed. MSCI was selected by 20.8% of those surveyed and Thomson Reuters by 12.5%. While the concept of “socially responsible investment” has a longer history, the introduction of considering more specific environmental, social and governance factors in investment decisions dates to the early 2000s. Of those considering ESG factors in equity investment decisions, on average 52% of assets are currently allocated based on ESG ratings. Among those surveyed, 41% of respondents indicated that ESG ratings factored into 100% of their asset allocations. While several of those who indicated ESG ratings factored in 100% of their allocations are also among those who’ve been considering ESG factors the longest, there were some investors who’ve considered ESG ratings only recently. Clearly, they’ve decided to go all-in with their ESG-based investment strategies from the start.   Note:  The Barclay Hedge Fund Manager/Investor Survey went out to hedge fund professionals between June 24 and July 11, 2019. We received 70 responses from people working in hedge funds and commodity trading adviser (CTA) funds.  …

BarclayHedge/MPI Hedge Fund Investor Survey: Rising concerns over slowing economic growth in 2019 could be driving a shift in hedge fund investor priorities

Hedge fund investors are coming to terms with the likelihood of slower economic growth and a gradual uptick in interest rates in 2019, according to the latest BarclayHedge, MPI Hedge Fund Investor Survey. Those concerns could be driving a shift in investor interest toward global macro managed futures and fixed income and away from equity strategies in the year ahead.…

What Sectors will be Hot – or Not – in 2018?

Year-end is traditionally a time when investors review their investment portfolios and make decisions about how to best rebalance their holdings for the coming year. As we approach the end of 2017, BarclayHedge surveyed fund of funds managers and other large investors to find out which sectors they most favor for 2018.…

What is your firm's approach to ML and AI? Find out with this month's BarclayHedge Fund Manager survey

The August Fund Manager Survey takes a look at machine learning and artificial intelligence (AI). After many false starts, these disciplines are having a big impact on every aspect of business that is data driven and are finding advocates in the trading and investing realms. We queried hedge fund managers and CTAs and asked for their opinion and position in this area; here are the findings.  …

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