Performance Persistence of Monthly Returns across Strategies: a Study of Asian Hedge funds

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Performance Persistence of Monthly Returns across
Strategies a Study of Asian Hedge funds

• By
• M. O. Sy (RMIT Melbourne, Australia)
• L.T. P. Nguyen (MMU, Malaysia)
• C. M. Yu (MMU, Malaysia)

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Table of Contents

• Objectives of the study
• Our Research Problem
• Related Literatures
• Our Research Methodology
• EurekaHedge Database
• Sample period
• Sampling method
• Results
• Key Conclusions

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Table of Contents

• Objectives of the study
• Research Problem
• Related Literatures
• Our Research Methodology
• Sample period
• Sampling method
• Results
• Key Conclusions

4
Objectives of the Study

• To investigate the performance persistence of
  Asian hedge funds in their returns across
  strategies over two consecutive months

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Table of Contents

• Objectives of the study
• Our Research Problem
• Related Literatures
• Our Research Methodology
• Sample period
• Sampling method
• Results
• Key Conclusions

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Our Research Problem

• Most of studies on performance persistence have
  done for the American and European hedge funds,
  but not many have done for Asian hedge funds.
• Evidence of persistence of a funds performance
  is very important to investors in making their
  optimal investment decision.
• Results are mixed through literatures for hedge
  funds. And for Asian hedge funds, limited studies
  are done.

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Table of Contents

• Objectives of the study
• Our Research Problem
• Related Literatures
• Our Research Methodology
• Sample period
• Sampling method
• Results
• Key Conclusions

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Related Literatures

• Hedge Funds return persist Edwards and Caglayan
  (2001), Harri and Brorsen (2002), Francis,
  Winston, and Melvyn (2003), Brown and Goetzmann
  (2001)
• Hedge fund returns persistence is in a
  short-term Harri and Brorsen (2004), Francis,
  Winston, and Melvyn (2003)
• Performance persistence in risks for hedge funds
  Herzberg and Mozes (2003), Kat and Menex (2003)
• No evidence of performance persistence in hedge
  funds Ennis, Richard, Sebastian, Michael (2003)

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Table of Contents

• Objectives of the study
• Our Research Problem
• Related Literatures
• Our Research Methodology
• EurekaHedge Database
• Sample period
• Sampling method
• Results
• Key Conclusions

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EurekaHedge Database 1999 - 2005
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EurekaHedge Database 1999 - 2005
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Our Research Methodology

• Sample 661 Asian hedge funds from 12 hedge fund
  strategies.
• Sample data Net of fee monthly returns
• Sample period January 1999 to December 2005 (84
  months of observation).
• Two considerations
• Result obtained from each strategy should
  represent the whole population of funds in that
  strategy.
• The performance of funds should be observed long
  enough to generalize the persistence in
  performance of each strategy overtime.
• To comply with the above two, we decided to
  observe the persistence for each strategy through
  4 sub-sample periods as well as full sample
  period.
• Subsamples Jan. 1999 Dec. 2000, Jan. 2001
  Dec. 2002, Jan. 2003 Dec. 2004, and Jan. 2005
  Dec. 2005.
• Full sample Jan. 1999 Dec. 2005.

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Our Research Methodology

• Methods of testing - Agarwal Naik (2000),
  Herzberg and Mozes (2003), Harri Brorsen
  (2002), Kat Menexe (2002) and Francis, Winston
  and Melvyn (2003)
• - Parametric (contigency table)
• - Non-Parametric (regression based model)

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Parametric Contingency Table

• Cross Product Ratio (CPR) Christensen 1990
• CPR (WW LL)/ (WL LW)
• WW win in the first month and win in the second
  month
• LL lose in the first month and lose in the
  second month
• WL win in the first month and lose in the
  second month
• LW lose in the first month and win in the second
  month
• Ho there is no persistence in performance of
  funds return or
• CPR 1

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Parametric Contingency Table

• Test statistics
• (1) Z ln(CPR)/ ? ln(CPR)
• ? ln(CPR) ? 1/ WW 1/WL 1/LW 1/LL
• Z - critical value 1.96 (5 level of
  significance)

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Parametric Contingency Table
(2) Chi-square Statistics
Critical value 3.84 (5 level) and 6.63 (1
level)
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Table of Contents

• Objectives of the study
• Our Research Problem
• Related Literatures
• Our Research Methodology
• EurekaHedge Database
• Sample period
• Sampling method
• Results
• Key Conclusions

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Non-Parametric Contingency Table

• Cross sectional regression Gujarati 2003
• r it ?1 ??kDk ?1.ri(t-1) ??k.Dk .ri(t-1)
  ?it
• where
• i 1,,n
• K 2,n
• t 1,,T
• ?it ? N(0,?2it)
• D dummy, ? intercept, ? slope coefficient for
  fund 1, ? slope coefficient for fund 2, 3, .,
  n.

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Results for CPRs and Slope Coefficient

• For arbitrage, results suggest that persistence
  in performance does not exist for this strategy.
  However, it is not significant for the whole
  sample period.
• For convertible arbitrage, results are available
  for full sample and two sub-periods. The positive
  slope coefficient for the regression line of this
  strategy suggests that there is no significant
  evidence of performance persistence for
  convertible arbitrage. While results for CPRs are
  not available for CTA, regression model gives
  some insight of this strategys performance. For
  full sample and sub-sample of 2001- 2002, results
  suggest that there is significant non-persistence
  for this strategy.
•  
• For long /short equities, results produced for
  whole sample period suggest that long short
  equities strategy does not have significant
  persistent. This might be due to the small number
  of funds selected for this sample, i.e. 30 funds.
  However, in our sub-sample for 2005, results
  show significant persistence for this strategy,
  which is similar to that obtained from CPRs. The
  number of fund in this sub-sample period is much
  larger, i.e. 303 funds.
•  

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Results for CPRs and Slope Coefficient

• For event driven results of regression analysis
  are similar to those from the previous test.
•  
• Compared to the results obtained from CPRs,
  results from regression method for distressed
  securities, macro, multi-strategy, and relative
  values show more significant evidences of their
  performance persistence.
•  
• CPRs results are more in favor of strategies such
  as event driven and fixed income for all
  sub-sample periods. However, for full sample
  period, these strategies show significant
  evidence of persistence in overall.

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Keyed Conclusions

• With cross-sectional regression, there are more
  significant evidences of performance persistence
  for Contingency Table for DISTRESSED DEBT,
  RELATIVE VALUE, EVENT DRIVEN, and MULTISTRATEGY,
  compared to those obtained from CPRs. However,
  there are less significant evidences for FIXED
  INCOME and EVENT DRIVEN.
• In both test, strategies show significant
  persistence in returns are DISTRESSED DEBT, EVENT
  DRIVEN, FIXED INCOME, AND MULTI-STRATEGIES.
• Mixed results for LONG/SHORT EQUITIES AND MACRO