For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 helpful comments. data analysis. for thankDavidChapman,Hsieh,Andre ShleiferandCharlesTrzcinka We Acknowledgments: Zhang thankAntoine Bernheim We forproviding thankJian for thedata.We the time, butlittle evidence ofdifferential manager skill. market, evidence consistent withpositive risk-adjusted returns over by funds,lowcovariancewiththeU.S.stock of high attritionrates defunct andcurrently operating funds.The industry ischaracterized over theperiod1989through 1995using adatabasethat includesboth hedge fundindustry theperformanceofoff-shore examine We Survival &Performance1989-1995 WilliamN.Goetzmann, Stephen J. Brown, Stephen J. Roger G.Ibbotson, Offshore HedgeFunds: Current Draft,January 2,1998 First Draft:September1996 NYU Abstract Yale SchoolofManagement Yale Yale SchoolofManagement Yale

Stern SchoolofBusiness For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 as market-neutral investment vehicles that pursued strategies akin to “arbitrage in expectations.” “arbitrage in to akin pursuedstrategies that vehicles investment as market-neutral they that arethought of is funds as nearly sk onmanager pure“bets” difficult. dynamic andthis activity exposures, measurement factor performance actively makes their shift Sharpe’s (1992)style analysis toasampleofmonthly hedge fund returns reveals thathedge funds fund strategies differfromthoseofopen-endequity mutualfundmanagers. Theirapplicationof portfolio. Arecentstudy ofhedge fundsby Fung andHsieh(1997)showshowdramatically hedge traded derivativesecurities.They may takeundiversifiedpositions,sellshortandleverupthe they caninvestininternationalanddomesticequities and debt,theentirearrayaddition, of flexibilitybroad inthe typeshave ofsecurities they holdand the types ofpositionsthey take. In positionsinpublicallyholding tradedsecurities.Unlikemutualfunds,they investment portfolios to mutualfundsinthatthey areactivelysimilar managedare and privateinvestors.Hedge funds 30%formorethantwodecades.Thesesuperiorreturnsexceeding have attracted bothinstitutional multibillion dollar Quantum Fund managed by George Soros, boastsreturns compounded annual funds.Thelargest ofthese,the hedge as small butinteresting classofinvestmentvehiclesknown I. Introduction performance. Compensation terms typically include a minimum investment, an annual fee of 1% - 1% of fee annual an investment, minimum a include typically terms Compensation performance. compensation structurewithintheindustrythe result, isbasedlargelya passiveAs benchmark. on instruments. They produce superior performance, and they are notjudged by their ability to track a Hedge fundmanagers mis-pricing ofsecuritiesusing seekoutandexploit avariety offinancial Despite the problems of performance measurement, the most interesting feature ofhedge feature interesting most the measurement, ofperformance problems the Despite A few highly the to managersattention successful decadeshavebrought two past overthe 1 ill. Thesefundswereconceived 1 For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 data. important respects.First, it isannualdataafterfees,whiletheFung andHsieh(1997)usemonthly among Hsieh(1997)inthree hedge fundmanagers. OurdatadifferfromthatusedinFungand and thequestionofperformancepersistence use thedatatoinvestigate hedge fundperformance, annual offshore fundreturnsthatincludesbothdefunctfundsandcurrently inoperation.We of 1989though 1995.Toaddressthecrucialproblemofsurvival,wedevelopadatabase period years. three than more survive relativelyis Fewhigh.funds hedge funds --orfundmanagers of -- disappear. Therateofattrition they that frequently is Thehedgefunds managing option. to ofthe downside cost high the offset to paid totake risks,and the further implication isthat investors believe that the manager has the skill portfolio every year, fee plusafixed to Clearly, coveroperating expenses. hedge fundoperatorsare poorly.the Thiscompensationiseffectively of anat-the-money calloptiononuptoaquarter whenitdoes compensation or sheisrewardedwhenthefunddoeswell,andreceivesabaseline ones. Thisasymmetric payoff to the manager hasobviousimplicationsformanager incentives:he structure orU.K.treasury eachyear, 0%return U.S. at suchasthe oragainstanindex rate. compensation This 2%, andanincentivefeeof5%to25%annualprofits.Theisusually benchmarked thresholds aresetaccording toendofthe year assetvalues.In addition, ourdatabaseincludesdefunct Typically, investors. to return year, endof the the managerat feesarecalculated andhigh water mark the normal reporting period for hedgeandfunds does not represent the month end holding period series ofannualreturns.On theotherhand,monthlyfromtime the datadoesnot correspond to 2 Thisisapotentialdrawback,sinceitlimitsthe ability to drawreliablestatisticalinferences In theperformance thispaperweexamine oftheuniverseoffshorehedge fundsoverthe usually includesa“high water mark” provisionthataddspastunmetthresholdstocurrent 2 For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 strategy, by whichlong positionsinundervaluedsecurities wouldbe offset andpartially fundedby hedge funds. distinguish now hadestablishedaninvestment fundasageneralJones partnership,withseveral characteristics which wentfromnovicetomaster overnight. Twomonthsbeforethe Jones of theYale-Harvard footballgame. Apparently aquickstudy, outcome to odd-lotstatisticsthe andotherwise — theystatistical ratios employed Theseranged volume/price market. from the call to strangereported schemesthe onthe new,— post-depression class ofstock-marketand timers analysis. investigated technicalmethodsofmarket Jones Hisarticle“FashionsinForecasting” sociologist turnedjournalistfundmanager. Onassignment to I.2 fund investorsarepredictablefrompastreportedreturns. hedge to returns whether funds intheperiodsince 1989andinvestigatehedge of performance the fund managers andstudy returns-basedstyle aremoreinterestedin We attributioninthiscontext. and ourgoals in this study differ aswell.Fung andHsieharemoreinterestedintheconductofhedge different are samples Our evaluation. the rolethatsurvivorshipplaysperformance postfund inex they makeoursamplecomplementary to Fung andHsieh’s(1997)databaseallowustoexamine because useful, presumablyare which themselves investinfundsthesample.Thesedifferences source. Finally, itisasampleofoff-shore fundsgathered byreturns. amajordata attrition onmeasured funds. Thisallowsustoestimatethe rateofattritioninthehedge funduniverseandthe effect of this

Background andHistoryoftheHedgeFundIndustry It doesnotincludecommodity trading advisors(CTAs) butitdoesinclude“Funds-of-Funds” The development of the hedgecommonly fundis attributed to Alfred Winslow Jones, a 3 Jones developedthenotionof ahedge fund asamarketneutral Jones 3 Fortune Fortune article went topress, magazine in1949, For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 recent rules by the SEC have further broadened the ability of hedge funds to attract individual and individual recent rulesbyattract to abilityfunds hedge theSEC havefurtherbroadenedthe of raising theceiling onthenumberofU.S.investors allowed in unregulated fundsto500.In addition, 1996, theNationalSecuritiesMarkets Improvement ActmodifiedtheInvestment Company Actby issuance ofsecurities,including restrictionsonpublic advertising andsolicitationofinvestors. In limitthehad to number governing regulations qualify from public 99to to ofinvestors forexclusion before1996,hedge funds purposes than 10%ofthesharesany single company.regulatory For limit fundleverage, shortselling, holding sharesofotherinvestmentcompanies,andholding more freedom fromregulatory controlsstipulatedby theInvestment Company Actof1940.Thesecontrols in publicsecurities.Thereisnocommondefinitionofahedge fund.Hedge f U.S. hedgeliability fundsisnowalimitedpartnership,or company established toinvest the “hedge” philosophy. a hedge fundindustry. Many fundsbegun inthiseraborrowedthefeestructure,butnotnecessarily arrangements indetail. NobodyKeeps Up With,” described the structure of the fund, and the incentive compensation term “hedge fund”todescribehismarketneutralstrategy. CarolLoomis’ produced a handful ofimitators, some ofwhomhe had trained. Jones Winslow decade,Alfred next realized fee.Overthe andnofixed —nohighmarks water profit 20%of was compensation fund,the investment (1995) original account TedCalwell’s ofJones’ to allowed large bets with otherinnovationwasanincentive fee.According limited resources.Jones’ short positions in others. This“hedged” positioneffectivelyothers. positionsin leveraged investmentcapital,and The hedge fundindustry hasgrown dramatically sincethe1960's. Thecurrentformofmost Another Fortune 4 The next few Theyears next produced a flurry ofimitators, and the development of article, this one in 1966 about Alfred Winslow Jones, actually Jones, 1966 aboutAlfredWinslow in coinedtheone this article, 4 Fortune unds are defined by their unds aredefined article,“TheJones For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 hedge funduniverseclaimedby industry participants. However, bothFung and Hsieh and our ownsamplesappeartocapturea substantial portionofthe universeofcurrentfundsthanmight beobtained by including on-shorefunds. smaller somewhat inourdatabase in1995representmorethan$40billion.Thus,wehavea The 399fundsextant theexclusions, hedge funduniverseincluded 701funds,representing morethan$72billionin1995. years ofhistorythree andfunds withlessthan$10millioninassets.Beforeless than these funds offunds, funds with excluding after 1995on309hedgefunds, through example, data compiled isachallenge. Fungfunds andHsieh(1997),for participants. Collecting reliabledataonthese fundswereinoperationwithassetsof$96billion. off-shore hedge funds were operating in1994withatotalassetvalueof$140billion.Simultaneously, 1,100 Nashville-based investmentadvisorestimatesthat3,000 a difficult. VanHedge Fund Advisors, ofthehedge funduniverseis size the performance knownduetoSECregulations, estimating market isdifficult. funds is hardtocomeby, andacarefulanalysis oftheconductandperformancethissector class ofinvestment. However,theabsenceofregulatory oversight meansthatreliabledataonhedge ofthis changes these andimportance Takentogether, can only size the increase serveto capital. they canacceptmoney suchaspensionfundswhohaveatleast$25millionin frominstitutions million incapitaltoinvest,andasophisticatedunderstanding ofthefinancialmarkets.In addition, institutional managed by 2,000 funds,ofwhich44%areoffshore. a majorsourceofdataonhedge fundperformance, estimatestheindustry sizein1996at$100billion Becausehedge fundsarelimited intheirability andmotivationtomakethemselvestheir money. Hedge funds can accept money from ”qualified investors,”whohave$5 money. Hedge fundscanacceptmoney from”qualified 5 6 In eachcase,theestimatescomefromindustry 5

Managed AccountReports , [MAR] For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 industry. Investor demandforshares in the mostimportantfunds insuresthatthetopmanagers are funds, itcontainsmostofthemajorhedge fundsandmanagers, andthus we believe it represents the non-U.S. investorstheopportunity toavoidtaxation. off-shore in forinvestors provide funds implications Such funds differ. Tax also investors. non-U.S. limit thenumberofaccounts. Thus, theoff-shorevehicleisameanstoraiseadditionalcapitalfrom based limited partnerships, hedge fundsintheUnitedStatescommonly havean offshore vehiclesetuptoinvestalongside U.S. Islands, Dublin andLuxembourg, liabilitiestonon-U.S.citizensareminimal.Mostmajor where tax Offshorehedge fundsdifferfromdomesticvehicles,inthat they are typically corporations registered ina tax-haven Islands, such asVirgin the British the Bahamas, Bermuda, the Cayman I.3 OffshoreHedgeFunds funds inthecurrency incomemarkets. andinternationalfixed markets inthe1990's hasbeenrightly orwrongly attributedtotheparticipation of “global macro” thought actions ofasingle hedge fundmanager havebeen using customderivative equity investments placedinmargin accountslevertheirpositionmanydollars times.The many funds,investment oftheindustryHowever, thesize isapoor measureofitsimportanceinthecapitalmarkets.For might havemoremoneyfor example, under management that theentirehedge fundindustry. business.Asingle mutualfundcompany suchasFidelity,insignificant portionoftheinvestment While the offshore hedgefund universe is smaller than the entire universe of U.S. hedge With anindustry sizeinthetenstohundredsofbillions,hedge fundsmight appeartobean tomove the Dowby points.The increased as much volatility as ten ofthe world’sdebt pari passu . The reason for thisisstraightforward. U.S.hedge fundsmust 6 7

For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 different, bothusemonthly returndata.Fung andHsieh(1997)apply Sharpe’s(1992) style analysis, through econometric‘styles analysis’ theproceduresusedby procedure.While papers are two the and Hsieh(1997)bothaddressthequestion ofdynamic benchmarksforperformancemeasurement suggest thatmanagers actively rebalance (1997)andFung theirportfolios.Brown andGoetzmann Currency Arbitrage,” “Market-Timing,” “Market-Neutral,” and “”Global” styles. These labels “Event-Driven,”“Futuresclassifies hedge & “Opportunistic,” fundmanagers intogroups suchas likely isnobroadconsensus,theinvestmentindustry tochange alotthrough time.Whilethere classificationsusedinthehedge fundindustry revealthattheportfolioweights are stylistic The evidence that Brown and Goetzmann (1997)report ofdynamic strategies among equity mutualfunds. evidence thathedge fundsstyles arebasedoncommon,activestrategies. Thiscorrespondswiththe (1997) todevelopstylistic classificationsbased on dynamic topassiveindices. They exposures find Hsieh and Fung motivates index natural a of lack This neutral. market hedge fundisinfact, classic meaningful benchmarkforthefunds.By design, they arenotintendedtotrackbroadindices--the I.4 HedgeFundStyles managed nearly twicetheassetsofon-shorefunds. to investinthesharesofotherfundsexclusively) aresubtractedfrom the universe,off-shorefunds substantial Billion$31.7 was invested in o the mostskillful.Of$68Billion managed by hedge fundsfollowedby MARinNovember 1996, tocapture inthisarena,wewouldexpect skill represented intheoff-shoreuniverse.If therewere A fundamental challenge in the evaluation of hedge fund performanceistoidentifyfund a hedge A fundamentalchallenge intheevaluationof portionofthehedge fundindustry asawhole. When “fundsoffunds”(i.e.,fundssetup ff-shore entities. This suggests that off-shore funds represent a ff-shore entities.Thissuggests that off-shorefundsrepresent 7 For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 of these methods are perfect. The simple high water mark provision isthemostcommonmethod mark of thesemethodsareperfect. Thesimplehigh water the offset advantage shares”to as“equalizing suchthings including imbalance, of money. later None ofthecurrentinvestors.Othermethods havebeenusedtocorrectthis expense the at investor at midyear In afteralossforthefirsthalf? commonpractice,yes, although thisbenefitsthemidyear of the incentive fee isa challenge. Do investors use the previous year’s high water mark ifthey enter thefund inmidyear,investors enterandexit thecalculationofhigh watermarkandattribution applicable. feebecomes year When next incentive the beforethe manager in loss upthe make must incentive feeisgenerallyIfprovision. mark thefundlosesmoney,water subjecttoahigh thenthe ofprofitaboveabase,typically,percentage theassetvalueatbeginning oftheyear. This return overayear,the orlesscommonly, overaquarter. on calculated I.4 IncentiveFeesandHighWater Marks section. the issueofannualperformancefeesissoimportant,weaddressitinnext total returncalculation,butlimiting thereliability ofbenchmarks basedonstylistic analysis. Because on whenfeesarecalculated compute to monthly report monthly returns, aredifficult feereturns after on quarterly somefunds orannualevaluations.While hedge fundafter-fee performanceisbased calculate sharepriceseachday, orclosed-endfundsthathavemarketpricesquoted on exchanges, of styles isinherently difficult inthecaseofhedge funds.Unlikeopen-endmutualfundsthatmust similar styles according performance,ratherthanwhat totheirrealized they claimed todo.Analysis while (1997)useaclassificationalgorithm Brown thatgroups andGoetzmann managers into broadly aquarterly orannualbasis.Theoffshorehedge funddataused in this paper is annual —allowing Most hedge fund managers fee chargeannual of 1% and an incentive a fixed fee of 20%, 8 8 The incentive fee is a feeis Theincentive For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 water mark. discourage managers from to taking is structure incentive new money whenthey high the arebelow However,thepracticaleffectofsimplehigh watermark calculation. of because ofitsease disposal, weestimatebasic riskandreturncharacteristicsofhedge funds.Weusethe datatodevelop andsurviving funds.Withinthelimitationsofannualdataatour that includesbothdefunct adatabase 1995,using 1989through from hedgefundperformance examine to paperis this in goal industry the ofwhether well isstillopen. performs question asawhole press,the Our financial the in Although claims ofsuperiorperformancebycomprehensive studiesexist. afewmanagers are cited few Inaccounts. obtain, little to contrast, isknown hedge about aresodifficult funds.Becausedata funds, pensioninvestmentmanagers inthepensionarenaandmanaged futures mutual I.5 FocusofCurrentResearch sufficiently tonolonger beincludedinhedge funddatabases. performance may have a high probabilityor at least decreasing ofgoing outofbusiness, insize toinvest.Thissuggests thatfundswithayear ortwoofpoor investors willingnessnew of the less the the managerand isoutofthemoney, thelessincentivetoacceptnewfunds, the manager is“outofthemoney,” themoreheorshemay increasevolatility. In addition,themore rationally adjusttheirstrategy depending onhowfarthey arefromthehigh water mark. The more may calculation highmark water newmoney, accept not simple the andmay using Managers following poor performance. Other money management vehicleshavebeenstudiedextensively. Muchisknownabout hasimplicationsforfundsurvival. Clearly, thetypicalstructure hedge fundcompensation 9 Thisislikely tobe mitigated by the reluctance ofinvestors toinvest new money 9 For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 persistence. yield ofperformance evidence these Noneof pre-fee performance. andconsider returns, forecastssuperior whetherfundsize intofinercategories, explore performance for thiswebreak classifications.managers One possibilitymajor few a havethat skilland the is rest donot.Totest fundsdownaccording totheirreturns-basedstyle break adjusted returns,evenwhenwe risk- or rawreturns in persistence ofperformance noevidence find We persistence. performance track records. We the explore profitability ofpicking winners via tests ofrelative and absolute past on based winners by picking presumably funds, hedge winning into dollars investor allocate to developed explicitly supposedskilldifferentials.Vehiclestermed“Fund-of-Funds” seek toexploit skill,iswhetherthereanymanager evidenceofrelativeskill.Oneclasshedge fundshas neutral risk-takers. fact that,onaverage, hedge fundmanagers atleastpartially liveuptotheirreputationasmarket- aS&P betaof.36overthesevenyearsequally-weightedhad --reflecting the offshorefundindex compared alowerannualstandarddeviationofreturn(9.07% average offshore hedge fundexperienced through 1995,comparedwiththeS&P 500returnof16.47%over the sameperiod.In addition,the risk. By contrast,wefindthattheaverage annualoffshorehedge fundreturnwas13.26 %from 1989 are interesting inlight ofwhatweknowaboutotherinvestmentvehicles. Finally, evidenceforperformance weexamine persistenceinthehedge funduniverse.Ourfindings some broadstylistic classifications, and wecomparethesewithself-reportedstylistic descriptions. A key question, given the intent of Alfred Winslow Jones to create a vehicle to leverage to A key tocreateavehicle Jones question,given theintentofAlfredWinslow Thepopularperceptionisthatoffshore hedge high returnsatconsiderable fundsexperience totheS&P’s 16.32%)andlowersystematic riskwithrespect to the U.S. stockmarket.The 10 It afundselector,commonly “Fund-of-Funds,” wouldbedifficulttoexpect a called 10 For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 enormous differencein data.Aswewillshow,thismakes an fund few sourcesofhedge funddatathatcontainsdefunct best, aquarterly basis. Finally, the areonly orat that onanannual, isannual,returns net feestructure valid andthus have anincentive benefit ofannualreturnsisthatcalculating monthly afte The frequently more with observeddata. beexpected would aregreater biases than survival thus statistical precision.In addition,weareunabletoobservefundsthatdisappearwithintheyear, and benchmarks arepoorly estimated,andthusrisk-adjusted returnsareestimatedwithalowdegree of arethatcovarianceswith drawbacks The Use ofannualdatainvolvesdrawbacksandbenefits. annual fee, the incentive fee, the name ofthe investment advisor(s) and the name ofthe principal(s). I.1 II. DataandPerformance to producesuperiorreturns. net asset value per share, the dividends paid inthe year, the computed total return (after fees), the datefundstarted,netassetvalueoffund, name, fund the obtained We editions. directory ofthe forthe eachvolume from data 1990through directory. hand-collected the We 1996 directory duetolackofdata,orquality of data, and sometimes fundshaveaskedtoberemovedfrom year ofpublication.Sometimes,thepublisher,AntoineBernheim, haschosentodropfundsfromthe since 1990.It providesinformation onmostoftheoffshorefundsoperating atthebeginning ofthe

Annual HedgeFundDatabasewithDefunctFunds The U.S.OffshoreFundsDirectory ex post observedperformance. U.S. OffshoreFundsDirectory is anannualguide tooffshorehedge fundspublished is 11 r-fee return isusually impossible.Mostfunds , publishedannually, isoneofthe 11 the For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 for the equal-weighted hedge fund index. Of course, averaging across fund managers masks arange across masks fund averaging Ofcourse, managers hedgefundindex. equal-weighted for the to have maintained a positive exposure tothe stock market: up years forthe S&P were also upyears we report each year are conditionalonsurviving theentireyear. returns, then the average annualreturnseachyear areupwardly biased. In otherwords,thereturns Fund. Note that therateofattritionforfundsisabout20%per year. The value-weighted return largely represents the results ofthe biggest fund in the sample, Quantum over theperiod.Onotherhand, value-weighted returnof24.71%since1990beatthemarket. of return 13.36% mean lagged Theequal-weighted period. same the of16.47% 500returns S&P the $4.7Billionto$40.3 over grewfrom 399by 1989to 78 in endof1995.Thecapitalization the MAR. the majorindustry datavendors.In fact,ourdatabase includesmorethan200fundsnotincludedin However, itdoes represent asubstantialportionofthenumber of fundsfollowedby MAR,oneof the only 51.6%ofthereportedtotalassets$35.4Billion attheendof1994.Thisanalysis suggests that smaller. Ofthe313funds reportedinOHFD94, the97fundsoverlapping thetwodatasetsrepresent The OHFD94 listisslightlyrepresented. are Billion inMAR94assets, mostofthe big funds funds intheMAR94 list, 97 wereinOHFD94 list.Sincethese97fundscomprise60.3%ofthe$38 SEC withthe availabletousbyreported bymade the inNovember1994 Managed AccountReports[MAR94] wecomparedthelistofhedge funds question, represent thehedge funduniverse.Toaddressthis database we have collected may notbeacomprehensivesampleofthe world’shedge funds. databasewehave Table 1reportstheannualsummary statisticsaboutthedata.Thenumberoffundsgrew from A key questionregarding the Offshore HedgeFundDirectory U.S.OffshoreFundsDirectory listofDecember Ofthe358hedge 1994 [OHFD94]. 12 13 Onaverage, hedge funds appear 12 iswhetherthefundsitreports If fundsdisappearduetopoor For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 As a result, we are cutting off the lower tail ofthe distributionofreturns, and imparting a positive beunlikely would they it that high water that reachthe perceived would objective. markperformance returns intheyear because itwas thatthefunddied.Presumably,terminated suchfundswere throwing outthefund are dollars infundsthatdisappearedwithineachyear.we Thus,ineffect, year.on defunctfunds,we cannotfollowtheinvestmentperformanceof Although wehavedata Survivorship may stillbeabiasing factor,given thatsomany funds disappear from thesampleeach fund portfoliosoverthe1989-1995period. respectively.5.7% Both are consistent with positive risk-adjusted performance of offshore hedge .43 and.33respectively, alphausing [1963] arithmetic andJensen’s annual returnsare16.6%and that ofthe S&P 500.TheS&P 500betasforthevalue-weighted andtheequal-weighted indicesare exceeding ratios Sharpe had volatile. Asaresult,bothequal-weightedindices andvalue-weighted equal-weighted index was lessvolatilethantheS&P 500,whilethevalue-weightedwasmore index the S&P inraw returns. index Thisperformance differential was matched by a risk differential: the in rawreturns,whilethevalue-weighted portfolio(dominated by theQuantumfund)outperformed selection conditions describedabove.Theequal-weighted portfoliounderperformedtheS&P index hedge funds,andforequal-weighted portfoliossubjecttothe offshore of weighted portfolios II.2 RawandRisk-AdjustedPerformance such asexchange rateinstruments,topurehedged betsonsecurity mispricing. potential managerof strategies, fromhigh-leverage marketassets bets toinvestment inzero-beta We should be careful about the inference that thefunds,onaverage, addedvalue. shouldbecarefulaboutthe We and valued- equal-weighted for returns geometricmean and arithmetic the reports 2 Table 13 For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 sample in Table 1. In each case, the set that includes defunct f defunct includes 1.In Table that in set sample each case,the and mean variance. Thus,the higher the fund volatility, the greater isthe difference between survival conditioning is positivelyto relatedto showthatbiasdue Goetzmann andRoss[1995] average overallfunds in the index, butitismoresevereforindividualfundsinthesample.Brown, the period imparts a bias inraw returns of almost 3% per year. We calculate the bias as simply the original 108offshore funds listedin1990. that meet thiscriterion.Although thefirsthedge fundsbegan inthe1950's, only 25 survive of the of conditioning requires thatafundsurvivetheentireseven-year history. Noticethatvery fewfunds types two to ofcond of hedge subject forfunds funds. Table statistics 2reports “look-ahead” bias. history ofreturns.Using oursample,wecanobtainalowerbound onthemagnitude of the resulting a sampleoffundsatpointintime,anddrawinferencesfromtheprior academictake studiesthat industry and no way tofindthisinformation.Thisisaparticular problemasweshallseeforboth neither thedatenortermsofmergers, andgiven theirunregulated status there is in principle bias toobservedreturns. Unlikemutualfunds,ifhedge fundsare merged intootherfunds,weknow sample, These conditioning effectsarevery strong. The sample of funds thefull in extant 1995 dominates a commercially available database that is only designed toofferinformationabout existing funds. inthelastperiodofsample.Thisa fundbeextant isthetypical conditioning onewouldfindin Notice the time-series ofminimumreturns forthe survived sample inTable 2 and the whole performance past of evaluation the in issue important aparticularly is conditioning Survival ex post ex ante , foreachyear ofanalysis. average, attheendof theconditioning onexistence On expected return. expected 14 Thesecondtype ofconditioning istherequirementthat 14 unds has muchunds lower minimum itioning. Thefirsttype ex post observed For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 describing fundactivity foreachfund foreachyear in the sample. Each year, weclassify thefunds to classify fundsintotengroups corresponding toindustry classifications. descriptions offundstylesperformance weusetext reported in of benchmarking fund appropriate benchmarkforfundperformance. To addresstheproblem III. Performance data. in bias survival the increase to likely is turn is This andfundclosure. performance astrong correlationbetweenpoorintra-yearimply future volatility. High watermarkprovisions futurereturns.Inexpected addition,investorswhobuy pastperformancearealsolikely to be buying Investors using pasttrack records shouldanticipatethathistoricalreturnsprobably exceed conditioning maysurvival haveimportanteffectsonthe The S&P 500isprovidedasabenchmark. year,last sample ofthosefundsthatsurvivedtheentiresevenyears. andanequal-weighted index weighted using index the the fullsample,in an equal-weightedextant were usingthat index those different indices:anequal- three the of performance unconditional returns.Figurethe 1compares Anaccurateestimateofperformance requiresintra-year dataoranestimateof period. during the by aninvestorinoffshorehedge funds is probably anupperboundontheperformance realized in theinterpretationofreturnsandSharpe ratios in Table 2. The performancereportedinthetable not have a recordoftheirpoorperformanceinthefinalyear oftheirlife.Thismay presentproblems theirdataisunavailableatyearout ofthesample.When do fall we performers end, Poor returns. Due tothenatureofhedge fundmarket-neutralpositions,theS&P In sum, the analysis ofadatabasethatincludesbothdefunctandsurviving fundssuggests that

by Fund Style 15 ex post The U.S.OffshoreFundsDirectory observedhistoricalperformance. 15 500 is not necessarily the 500 isnotnecessarily We read the paragraphs readthe We ex-post observed ex ante For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 except short sellers and statistically significant infourcasesexceptstatistically shortsellers and betas onthe series’ and calculated alphas and Sharpe ratios. Alphas were positive forall categories years,six the worstperformers were short-sellers. Despite the shorttime series, we estimated CAPM funds andisthetopperformer.Notsurprisingly, given the stockmarket’ssuccess overthepast U.S. year performance by sector.Performanceisweighted by theestimated fundvalueatthebeginning ofeach year, suggesting thatthefundsdidnotchange their strategy, atleastostensibly. Table3reportsthe Strategy. offundactivity Indifferedlittlefromyear theprocess,wefoundthatdescription to ShortSeller,Commodities/DerivativesandMulti- Sector Fund, GlobalFund, Fund-of-Fund, oftengroups:into one Event-Driven,MarketNeutral,Trend/Timing, U.S.Opportunity, should becautiousabout drawing inferences fromcorrelationsbasedon such a short timeperiod. investors. Thismayrecentyears.in increased bewhyhas One funds hedge institutionalinterest in some possibilitystyleshedgefund some provideddiversificationoverthe1990's that for portfolio CTA’s. Themodestcorrelationofcertaincategories totheU.S. stockandbondmarketssuggest Optionsstyleand The notable that may exception isthe Commodities/ Futures be related tothe benchmarks. Mosthavenegative correlation to the GScommodity andtheRefco CTAindex index between returnsonself-reportedfundstyles andassetclassreturnscommonly used as performance categories appeared toprovide positive value-weighted risk-adjusted performance. per year witheffectively zero market and exposure, lowvolatility. In summary, the individual style The classic “hedge fund” category, by represented style, 9% than market-neutral more the returned designed toselectsuperiormanagers, hadbelow average returnscomparedwiththebroadsample. to provide a value-weighted return for the style. forthe return by style avalue-weighted The“Global” provide dominated to is Soros the How dohedgecorrelations fundstyles Table4reports correlatetootherassetclasses? 16 16 . Funds-of-Funds, despitebeing 17 . For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 persistence inyear toyear returns Slopes forthe last fouryears inthe sample are significant at standard confidence levels, suggesting slopes for each ofthese tests. Three years have positive slopes and three years have negative slopes. OLScurrent returns.Figure scatterplotswith regression 2showssix linesshowing theregression IV.1 performancepersistence. various formsoftestsappliedtoexamine followingof differentialskillamong sections,weshowthe offshorehedge fundmanagers.the In mispricing. Thus,benchmark, butratherseektoexploit it is striking tofind absolutely noevidence Unlike mutualfunds Persistence IV. Performance managers may investmorefrequently indistressedfirms. bycharacterized pricetobookratios,thissuggestsand lowpricetoearnings thatEvent-Driven S&P/BARRA Nevertheless, itisofpotentialinteresttonotethatEvent-Drivenfundshaveahigh correlationtothe few consistently outstanding funds. theybecause ofa shownoevidence examine, to useful are figures negativedependence.The then suggests that an unidentified factor, such as a “styles effect” may be driving the systematic positive, in 1991-92and1992-93.However, the pattern lose.This reversesin1993-94and1994-95.Winners

Persistence inRawFundReturns The simplest persistencetestisayear-by-year cross-sectional regression of past returns on seemstobetheidealplacelookforevidenceofmanager skill. arena The hedge fund Perhaps a few large funds, like Soros’ Quantum fund, are consistently successful. In we fact, successful. funds, fund,areconsistently afewlarge like Quantum Perhaps Soros’ Value index anda Valueindex low correlation Given that“Value”stocksare totheGrowthindex. 18 andotherinvestmenttrusts,hedge fundmanagers donotseektotracka 19 . Results reported in Table5showthatwinnersfollow 17 For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 bench-marking affects the results very little. Indeed, itdoes noteven remove the evidence of cross- style self-reported eachyear. the subtracted benchmarks with tests Style persistence of results the Table cohort? their beat 9reports consistently managers neutral agroupofmarket Does style means. persistence isaffectedbyon by evidence returns bench-markingthe how consider to sense makes IV.2 reported inTable8suggest thathigher-fee fundsperformnobetterthanlower-feefunds. unrelated to future performance. High performancefeesarecharacteristicofhedge funds.Yet,results are offeesfromtheperformancecomparison. Thissuggests thatperformance fees exclusion funds. TheseresultsarereportedinTable 7.Theresultsarenotatallsensitive to to the returns fee managers theirfullvalue-addedthrough fees. canextract To test thisproposition, weestimatedpre- reported earlier.Thereisnoevidencethatmanagers, ratherthanfunds,repeat. those to weighting allfundsforwhichthey werenamedasadvisoryieldsidentical resultsalmost ratherthanfunds.Creatingcurrent sample.Perhapsmanagersrepeat, manager returnsby equal- “large” fundsinthe and“small” arerelativetomedianNAV.Big fundsdonobetterthansmall large fundsoverthatofsmallwhere of against orwhetherwelookattheperformance size, superior funds, ifinvestorswereabletochoose thelargestmight fundstooutperformthesmaller expect 1991-92 superior to Apparently unrelated returns. is size relative possibly period except performance, forthe and futurereturn.Table6suggests measuredby thatsize log NAVmay beapoorpredictoroffuture

Persistence in Style-Adjusted Returns Style-Adjusted in Persistence Because hedge fund managers pursue such disparate, and possibly dynamic strategies, it Because hedgedynamic fundmanagers pursuesuchdisparate,andpossibly We also considered the possibility persists ona that performance pre-fee basis and that 21 . This result follows whether we examine . Thisresultfollowswhetherwe regressionsexamine ofsubsequentperiodperformance ex ante . 20 To test this proposition, we examined therelationshipbetweenfundsize Totestthisproposition, weexamined 18 For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 relative totheirownstyle benchmark repeatedly relativemanagers, performance lost the manager, weconsider median whether or the to outstanding selecting in success of claim Funds Fund who managers, success. persistent of evidence showing ofpersistent evenmarginal evidence only classification with winners, Driven” “Event the picture inFigureobtaindifferent a quite 4.After subtracting a style benchmark, there islittle to themedian hedge fund managerrelative well ineach year.we quite did However, funds Sector and infactgiven theirlosses,rarely persistinoursamplemorethantwoyears. Ontheotherhand, category.Winner-Winner by an“S”inthescatterplots)appearpredominantly intheupperright quadrantsassociated withthe with theviewthatmanager skillisstyle-specific. theSorosfunds(marked Asaparticularexample, congregationsome of particular consistent is observation This styles quadrants. other eachofthe in be to appear does there However, ourdatasource). in results of non-reporting to least at (or failure of and Winner-Loser predictive is performance figures.(lower Poor eachofthe right in quadrant) that were inthe database forless than three years congregate in the Loser-Loser (lower left quadrant) using appraisal ratiosinsteadofalphasinthecross-sectionregression. sensitive toperformance-based attrition in the sample. However, thiseffect isalmost eliminated by whichsuggestand Ross[1992] thatcross-sectionregressions ofsequentialalphasarehighly Thisisconsistentdoes affectthispatterntosomeextent. withresultsofBrown, Ibbotson Goetzmann years. sectional correlation manifested by the presence of large positive and large negative t-statistics across The use of the appraisal ratio (Jensen’s alphameasuredinunitsofresidualstandard Theuseoftheappraisalratio(Jensen’s deviation) Figure 3 appears to support this position. Shortsellers did poorly in this bull market period, market bull poorly did this in Shortsellers position. this support to 3appears Figure “0" scatter plotsofFiguremarked FundsThe 2display performance. repeat thepattern of 22 19 For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 history ofperformance differential manager skill.While some managers such as George Sorosappear tohave had a strong risk-adjusted returns.Neither rawreturnsnorstyle adjustedbenchmarksprovidemuchevidenceof Offshore FundsDirectory ofthesemanagers. usetheself-reportedmanagers’ We activity togroup the specialization by alpha.Littleand Jensen’s and publicinformationisavailableabouttheinvestmentstrategies Offshore fundsasagroup havepositiverisk-adjustedperformancewhenmeasuredby Sharperatios investor performance.Nevertheless,the annual dataatourdisposalrevealsomeinteresting results. thecalculationoftrue hampers by is characterized high attritionratesoffunds,aproblemthat through 1995using adatabasethatincludesbothdefunctandcurrently operating funds.Theindustry V. Conclusion We examine the performance of the off-shorehedge fundindustry of overtheperiod1989 theperformance examine We 23 , they necessarily donot packeachyear. the beat universes into11basic styles. Allbutone ofthese styles provide positive 20 U.S. For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 Run PersistenceofPerformance, 1974-1988,” Funds:Short- Mutual Daryl, in Hands Hendricks, Zeckhauser, 1993,“Hot JayenduandRichard Patel of Finance theGrowthinActivelyGruber, Martin,1996,“AnotherPuzzle: Managed Mutual Funds,” Journal ofFinance MutualFund Performance,” of Grinblatt, MarkandSheridanTitman,1992,“The Persistence Analysis ofMonthly Returns,”Working Paper,UCLA Business School. Grinblatt, MarkandSheridanTitman,1988,“The EvaluationofMutualFund Performance:an Fund Performance,” William N. and Roger G.Goetzmann, Ibbotson, 1994,“Do Winners Repeat? Patterns inMutual the CaseofHedge Funds,” Fung, WilliamandDavidHsieh,1997,“Empirical CharacteristicsofDynamic Trading Strategies: Mutual Fund Performance,” Edwin MartinElton, Gruber and Christopher Blake, 1996,“The Persistence of Risk-Adjusted Columbia University GraduateSchoolofBusiness Working Paper. Park,1996,“ThePersistenceofManagedEdwards, Franklin andJames DerivativesPortfolios,” Southern California. Carhart, Mark, 1996,“OnPersistenceinMutualFund Performance,”Working Paper,University of and Klein,eds. Caldwell, Ted,1995,“Introduction: TheModeling ofSuperiorPerformance,”inLederman, Jesse “Survivor Bias inPerformanceStudies,” Brown, Stephen William N. J., Ibbotson Goetzmann,G. and Roger Stephen A. Ross,1992, Finance WilliamN.GoetzmannandStephenA.Ross,1995,“Survival,” Brown, J., Stephen Finance Brown, Directory, Inc., NewYork. Bernheim, Antoine, 1990-1997, References Stephen J. and William N. Goetzmann, 1995, “Performance Persistence,” andWilliamN.Goetzmann,1995,“Performance StephenJ. , 50:3,853-873. , 50,679-698. , 51. Hedge Funds , 42,1977-1984. Journal ofPortfolioManagement the ReviewofFinancialStudies Journal ofBusiness , NewYork,Irwin ProfessionalPublishing. The U.S.Offshore Funds Directory Review ofFinancialStudies Journal ofFinance 21 69,133-157. 20,9-18. , 10,2,Summer,pp.275-302. 48,65-91. 5,553-580. , TheU.S.OffshoreFunds Journal of Journal of Journal For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 Zheng, Lu, 1996,“Is Money Smart,”Working Paper,YaleSchoolofManagement. 1985-1994," Working Paper,StanfordUniversity Business School. Sharpe, William, Finance Burton,Malkiel, 1991,” Investing Equity From 1971to Funds in 1995,“Returns Mutual York. Lederman, and Jesse Robert A.Klein,eds.,1995, Paper. Ibbotson, Roger, 1996,“DoManagers Style,” RepeatWith ManagementWorking YaleSchoolof , 50,549-572. 1995, “TheStyles andPerformanceofLarge SeasonedU.S.MutualFunds, 22 Hedge Funds , Irwin ProfessionalPublishing, New Journal of For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 of returns inexcess of the treasury rate. Notes: Fund returns are reported after fee inpercent. Average annual incentive fee is typically paidas percentage of positive 949 9 5 5124,4,1,6 83 30 47 9. 4. .5 18.497 18.753 1.551 1.644 19.096 19.344 19.755 -40.3 -49.8 1.621 19.548 19.519 1.809 1.744 296.9 -30.3 1.786 1.647 -24.4 105.1 -33.6 -53.4 -30.7 14.70 155.6 92.4 -2.00 57.3 23.05 94.6 85.9 -7.03 22.15 10.70 18.32 20.30 41.94 -1.60 15.90 36.99 3.80 NA 40,345,412,365 36.95 24.59 16.37 11.98 35,419,454,000 152 18.08 17.13 39,064,117,965 108 4.36 18,876,303,000 65 112 4,721,256,000 11,466,358,100 61 58 6,153,900,000 53 23 450 47 27 363 19 399 316 17 313 210 1994-95 265 155 1993-94 176 137 98 1992-93 142 1991-92 108 78 1990-91 1989-90 1988-89 Year Number of Number Funds Number of Number Advisors Table 1: AnnualStatistics Summary for Offshore Hedge Funds

Some funds have multiple advisors. Number of Number or defunct dropped funds Number of Number new funds Total Capitalization in U.S. Dollars U.S. in 23 Arithmetic weighted Return Equal- Mean Arithmetic weighted Value - Value Return Mean returns each year, although insome instances itispaidasapercentage Median Return Maximum Return Minimum Return Average Annual Fee Incentive Average Fee For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 952 80 92 .4 05-22.7 -24.5 -30.3 -15.7 40.5 31.2 -16.2 -26.5 61.9 5.6 68.4 2.847 2.082 56.8 29.2 3.578 2.877 49.5 19.25 3.791 0.4 3.031 17.9 2.62 9.8 18.06 -0.92 22.7 2.7 18.14 22.2 13.00 28 24.13 29 2.04 29 23.68 29 1995 27 1994 25 1993 19 1992 1991 1990 1989 erNMA E TERMXMIN MAX STDERR MED MIN MEAN MAX N STDERR Year MED MEAN N Year 95381.2 47149269-40.3 -49.8 -30.3 -15.7 296.9 -36.1 -26.5 105.1 155.6 5.6 92.4 1.429 75.4 1.031 47.5 2.012 49.5 1.592 14.7 2.876 2.833 -0.8 23.6 2.623 13.9 18.323 18.8 -0.293 3.9 26.467 22.2 16.083 368 21.905 231 5.963 159 23.681 104 1995 55 1994 37 1993 19 1992 1991 1990 1989 Table 2:SurvivalConditioningEffects hreRto11 .409 .70.73 1.17 0.94 0.94 1.19 Sharpe Ratio rtmtc2.11.71.21.216.47 16.02 14.02 13.27 24.71 Arithmetic emti 34 29 36 56 15 15.65 13.63 12.94 23.48 Geometric t.dv 67 .092 .615.11 9.06 9.23 8.40 16.72 Std. dev. Summary statistics for funds that survived the whole period whole the survived that funds for Summary statistics Summary statistics for funds that existed at the last period last the at existed that funds for Summary statistics Weighted Index Survival on Effects Estimates Mean of Returns Mean Return For Value- For Weighted Index Mean Return For Equal- 24 Surviving Entire Mean Return For Funds Period Extant atLast Mean Return For Funds Period Mean Return for the S&P for the 500 Index For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 hre ai 067037036096097098126076-.6 1.376 -0.767 0.766 1.236 0.958 0.907 0.956 0.356 0.387 0.637 Sharpe Ratio t-value of Jensen’s emti 70%1.6 .2 11%1.5 41%3.6 61%-28%15.22% -12.83% 16.13% 31.36% 24.17% 15.85% 21.10% 9.32% 12.56% 17.07% Geometric t.Dv1.1 21%1.0 69%1.3 14%2.5 44%1.1 6.16% 19.41% 14.44% 21.85% 21.46% 12.73% 16.91% 11.80% 22.15% 19.81% Std. Dev vrg 84%1.1 .7 20%1.8 57%3.4 69%-10%15.36% -11.08% 16.95% 33.04% 25.73% 16.48% 22.07% 9.87% 14.41% 18.48% Average 94-.4 1.8 .1 .3 59%-.4 58%-.0 66%9.77% 20.36% 23.79% 5.73% 16.68% -11.50% 14.14% 17.76% 15.95% -9.86% 28.19% -9.00% -12.61% N/A -38.12% 32.44% 22.42% -5.84% 25.97% 5.77% N/A 19.16% 54.13% 46.45% -5.14% 52.58% 16.11% 26.33% 51.94% 23.01% 25.54% -5.98% 29.69% 19.29% 11.78% 59.44% 18.22% 33.06% 1.33% 25.30% 11.87% 8.91% 31.60% 17.53% -7.99% 25.20% 52.01% 3.81% 19.60% 6.70% 20.14% 14.27% 24.29% 13.86% -14.08% 27.77% 39.76% 4.39% 15.12% 7.10% 44.26% -9.14% 16.44% 52.10% 1995 -9.55% 21.23% 9.80% 1994 27.00% 1993 -0.17% 1992 23.22% 1991 1990 1989 ea041034-.3 .1 .4 .9 .8 .6 0900.249 -0.960 0.464 0.285 1.092 0.644 0.413 -0.035 0.364 0.471 Beta " " Value WeightedReturnBenchmarks: ut vn rvnMt eta Mkt.Trend/Tim Mkt.Neutral EventDriven Multi .%50 .%1.%40 .%2.%64 28 7.2% -2.8% 6.4% 24.5% 8.2% 4.0% 12.1% 4.9% 5.0% 7.9% .907 .919 .213 .814 16 3.69 -1.64 1.49 3.08 1.39 2.12 1.96 0.89 0.76 1.09 Table 3:ReturnonSelf-ReportedInvestmentStyles ing ..OpySco lblFn fFnsSotSlesCommodities ShortSellers FundofFunds Global Sector U.S. Oppty 25 Futures/ Options For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 S&P/BARRA Growth S&P500 Total Return S&P/BARRA Value Gold Total Return Total Gold SB Non-US$ Bnd Non-US$ SB MSCI Europe TR MSCI Pacific TR MSCI World TR MAR Fund/Pool MSCI EAFE TR U.S. LTU.S. Gvt TR GS Commodity MAR Advisor Refco CTA 05 03 08 .2-.4-.8-.1-.407 -0.34 0.78 -0.34 -0.71 -0.58 -0.54 0.02 -0.88 -0.37 -0.57 .403 .501 .105 .305 03 0.86 0.80 0.75 -0.32 0.12 0.58 -0.20 0.15 0.52 0.12 0.33 -0.52 0.77 0.53 -0.51 0.23 0.31 -0.66 0.86 0.17 0.57 -0.59 0.23 0.38 0.56 -0.15 -0.70 0.63 0.44 0.00 0.22 0.43 0.69 0.70 0.42 0.44 0.54 0.61 -0.70 0.27 0.54 0.36 0.44 0.26 0.50 -0.64 0.33 0.61 0.14 0.28 0.26 -0.70 0.08 0.32 0.46 -0.09 0.22 0.82 0.36 0.76 0.04 0.49 0.38 0.31 0.25 0.79 0.31 0.23 0.10 0.43 0.33 0.50 0.81 0.11 -0.23 0.20 0.27 0.39 0.77 -0.02 -0.17 0.35 0.40 0.83 0.51 0.27 0.33 0.16 0.82 0.24 0.30 0.64 -0.04 0.23 -0.02 0.61 0.89 0.39 0.01 0.69 -0.11 0.12 0.83 -0.01 -0.08 0.25 0.47 0.36 0.46 0.49 0.38 -0.10 0.45 0.03 0.15 0.38 0.39 0.00 0.57 -0.03 -0.04 0.16 0.45 0.68 0.51 0.13 0.25 0.60 0.63 0.36 ut vn rvnMt eta k.rn/iigUS pt etrGoa udo ud hr elr Commodities/Fut Short Sellers Fund of Funds Global Sector U.S. Oppty Mkt.Trend/Timing Mkt.Neutral Event Driven Multi Table 4: Correlations with Other Benchmarks Other with Correlations 4: Table 26 ures/Options For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 to this measure of standard error. TheCoefficient, t-stat andR error givenasthesquarerootofsumreciprocalsthesecellcounts. TheZscorereferstothelog-oddsexpressed Log-oddsLosers. are defined asln((WW*LL)/(LW*WL)) which isasymptotically distributed asNormal, with mean zero andstandard successiv denotes LL and order, this reversesWL year, LW denotesLosersinthefirstyearandWinnerssecondcomparison WinnersNotes: andLosers are defined relative to the medianmanager return ineachcomparison year. WW denotessuccessivewinn manager returnsinoneyearagainsttheprevious wherereturnsarereportedforthemanagerinbothyea Year 1994-95 1993-94 1992-93 1991-92 1990-91 1989-90 Total ofiin -ttR t-stat Coefficient 063-.10134 66 1-.4-2.034 -5.033 -0.54 -1.58 51 -1.793 30 -0.885 65 14 65 66 21 65 49 21 29 0.133 13 0.043 -5.91 -2.88 -0.603 0.028 -0.121 -1.4 -0.206 .2 .20054 42 01323.755 2.066 1.322 0.932 0.142 50 26 0.087 25 12 16 24 11 16 45 10 25 0.085 10 0.113 3.62 3.21 0.024 0.422 0.223 1.01 0.158 Table 5:Repeat-WinnerTestResults 2 WL LL o-dsZ log-odds LL WL LW WW 7 0 0 8 02 -1.857 -0.27 183 203 202 171 2 columnsrefertotheregressioncoefficient,t-valueandR 27 2 regressing relative rs. ers, e For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 t-stat and R and t-stat LosersLarge andSmall Losers are defined similarly. Log-odds and Z scores are defined asintheprevious Table,andtheCoeffi Winners.Small denoted are won subsequently that funds Small in oneyearthatwonthesecondaredenotedLargeWinners. f median the than greater or NAV at with WinnersNotes: and Losers are defined relative tothemedian manager return ineachcomparison year. Defining large funds asfu Year in thepreviousyear. 1994-95 1993-94 1992-93 1991-92 1990-91 1989-90 Total 2 columns refer totheregression coefficient, t-value andR ofiin -ttR t-stat Coefficient .125 .45 73 30932.939 0.646 0.983 0.541 0.244 43 0.235 28 22 31 27 20 27 26 20 52 32 23 0.04 0.09 0.01 2.53 3.21 2.71 0.83 2.89 1.57 09-. 86 54 031-1.16 -0.301 -1.903 46 -0.542 48 -0.384 65 -0.205 66 65 15 50 68 17 40 0 13 0.02 -0.9 12 -2.27 -0.9 -1.3 0.04 -1.53 -2.2 Table 6:SizeandRelativePerformance und size, andsmall funds as those thathad 2 Winners Large 2 0 2 0 .0 0.068 0.009 202 226 201 227 28 2 regressing manager returns in one year against ln(NAV) recorded ln(NAV) against year one in returns manager regressing Winners Small NAV less than that of the median f median the of that than NAV less Losers Large Losers Small o-dsZ log-odds und, large funds cient, nds For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 Notes: NumbersinthisTablecorrespondtonumbersreported5, exceptthatreturnsaremeasuredonapre-feebasis Year 1994-95 1993-94 1992-93 1991-92 1990-91 1989-90 Total ofiin -ttR t-stat Coefficient 05 5340166 05 0-.5 -1.294 -0.355 40 -1.333 -0.836 58 6 60 15 61 12 0.116 13 -5.324 -0.56 0.059 -1.667 -0.27 .83670183 41 31683.705 1.867 1.608 0.972 33 18 17 13 14 11 36 21 0.118 0.094 3.627 0.033 2.509 0.48 0.21 0.89 0.22 01-.6 .32 54 1-.7 -4.064 -1.476 21 49 45 24 0.03 -2.061 -0.1 Table 7:Pre-feeFundPersistence 2 WL LL o-dsZ log-odds LL WL LW WW 6 4 5 2 012-0.678 -0.112 125 156 147 164 29 9547 .4 1.368 1.147 For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 fees recordedinthepreviousyear. Year the Coefficient,the t-stat andR Winners. High Fee Losers andLow Fee Losers are defined similarly.. Log-odds andZ scores are defined as intheprevious Table, Low fee funds thatsubsequently oneyearin won thatwon are inthesecond year denotedLow are Fee denotedHighWinners. Fee with base fees at or greater thanthemedian fee, andlow fee funds as those thathadfees less thanthatof themedian fund, h in return manager median the to relative aredefined Losers and Winners Notes: 1994-95 1993-94 1992-93 1991-92 1990-91 1989-90 Total ofiin -ttR t-stat Coefficient 03 063089 88 082-1.976 -0.922 -0.892 -0.449 83 -1.696 67 -0.754 -1.079 -0.591 18 12 34 24 90 70 10 5 8 8 40 26 0 4 0 3 -0.683 0.04 -0.051 -0.39 0.01 -0.02 -1.874 -0.617 -1.25 -6.48 .9024084 4-.4-0.265 -0.14 1.387 44 1.623 9 19 45 1 8 15 0 4 0.224 0.09 0.19 1.932 2.31 Table 8:FeesandRelativePerformance 2 columns refer to the regression coefficient, t-value andR 2 High Fee Winners 5265 7 056-2.178 -0.506 271 55 286 35 30 Low Fee Winners each comparison year. Defining high fee f fee high Defining year. comparison each High Fee 2 regressing manager returns in oneyear against Losers Low Fee Losers o-dsZ log-odds unds as funds igh fee funds igh and For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 Alpha for agiven year was constructed as the annual reported fund return limited to funds with three or more years of reported returns. 1.14, 2.69,3.39,-2.75 and-5.66 respectively. The appraisal ratio is constructed by standardizing each alpha by the standard classification ineach annual issue of 949 .4203 .048 28 8-.9 -0.442 -0.098 -0.45 78 -0.649 -0.101 -0.211 -0.974 75 34 86 -0.48 -1.666 -1.039 -1.609 13 -0.547 83 42 82 2 11 21 79 38 82 19 10 17 79 38 0.0014 15 6 -0.037 0.37 17 0.0184 -0.005 -0.043 -0.082 -0.052 0.2720 -1.33 0.0462 15 203 -0.007 -0.023 -0.01 -0.104 4.49 6 -0.322 1994-95 0.0064 159 -0.1142 56 -0.034 -0.214 115 202 -0.46 0.4920 1993-94 0.0143 41 14 158 -0.67 1992-93 0.0000 -0.0849 55 114 197 -0.03 1991-92 -0.1133 40 13 153 1990-91 109 -0.0063 195 50 1989-90 151 35 8 107 0.1144 48 -5.43 Appraisal Ratio 0.0385 33 0.0828 -2.71 6 -0.5549 3.56 0.0806 1994-95 -0.1214 2.66 0.0054 0.3494 1993-94 0.60 0.0292 0.2851 1992-93 1.08 0.0681 1991-92 0.2272 1990-91 1989-90 Alpha erCe -ttRs WL LL o dsZ log LL odds WL LW WW R-sq Z t-stat log LL Year Coef odds WL LW WW R-sq t-stat Year Coef Table 9:WinnerRepeatResults:AlphaandAppraisalRatio Constructed UsingStatedStyleBenchmarks The U.S. Offshore Funds Directory . Results using Jensen’s alpha were similar, with t-statistics for each comparison period of 0.85,- 31 less the weighted style benchmark returns given in Table 3 for the self-reported style self-reported forthe Table 3 in given returns style weighted benchmark the deviation of fund alphas, andis necessarily For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 32 For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 Figure 2:Yearby PerformancePersistence 33 For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 34 For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 Notes information aboutfundreturns, sincethisgroup includesfundsthatbegan withintheyear 1989. 14. Funds andreturnsfor1989are takenfromthe1990volume.Thuswehaveonly limited year. arecurrently13. We working onmethodsforestimating theunconditionalmeanreturnseach Chapman forpointing outtherelevanceofthiscomparison. differing timeperiods,ormay beduetotheinherentriskinessofhedge funds.WethankDavid we foundfortheperiod1976through 1995.Thismay 1992inBrown andGoetzmann bedueto 12. Theattritionrateofhedge fundsappearsslightly higher thantherateforequity mutualfunds 11.Including dividendsassuming re-investmentonthedateofpayment. 1995,Malkiel,Carhart,1996,andElton,Gruber,DasBlake, 1996. Goetzmann, 1992, Hendricks,PatelandZeckhauser,Ibbotson, 1993,Goetzmann 1994,Brown and 10.For evidenceofperformancepersistenceinmutualfunds,seeGrinblattandTitman,1988 9. Ibid. Stocks,1994. 1994 article,“TheIns andOutsofIncentive Fees,” incentive feeforaperformanceperiodoflessthatyear, according toAnthony inhis, Stocks, 8. Managers registered undertheInvestment AdvisorsActarepreventedfromreceiving an July, 61-70. 7. Willoughby, 1997,“Saving withPaulTudorJones,” theWorld Jack, November, http://www.marhedge.com/mar/faq_hgrw.html. 6. Managed AccountReports,Inc., 1996,“TheHedge Fund Universe,”MAR/HEDGE, 1995. Equity,5. World 1995,“Hedge Fund Performance:theFacts Equity, andFiction,” World 20, 4. Loomis, Nobody Carol,1966,“TheJones KeepsUpWith,” interview withthose whoknew him. careeron 3. MuchofthisaccountistakenfromCaldwell,whobasedhisJones’ presumably thebasisonwhichmonthly returnsarecalculated. has becomecommontoaccruetheannualperformancefeeonamonthly basis.Thisis on performance.Thus,thefeeisunknownuntilendofreporting period.Nevertheless,it by investorsbecausemosthedge fundscalculatemanager feesannualoratbestquarterly based 2. TheFung and Hsieh(1997)dataaremonthly returns.Thesereturnsarenotnecessarily realized and Klein,eds. 1.Caldwell, Ted,1995,“Introduction: TheModelofSuperiorPerformance,”inLederman, Jess Hedge Funds , NewYork,Irwin ProfessionalPublishing. 35 Hedge FundNews Fortune , August 1994,p.6. April,237-247. Institutional Investor , For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 results 21.Regressions ofreturnsonpreviousperiodlogged andunlogged fundNAVyielded similar alone isnot. or arisk-adjustedbenchmark.Thus,while“hotmoney” may besmartinmutualfunds,money find evidencethatcapital-weighted indicesoffundsoutperform equal-weighted indicesoffunds (1995)norZhengforecast positiverelativeperformance.NeitherBrown andGoetzmann (1996) 20. Gruber(1996)andZheng (1996)findevidencethatnewmoney flowsintomutualfunds correlated style may exposures accountforthisfactor. overstatement ofthemagnitude ofthesestatistics.Figures 3and4providesomeevidencethat statistic sign changes suggests thepresenceofanunaccountedforfactorwhichwouldleadto The patternoft- scoresfromlog-oddsand z [1995]). ratiotests(seeBrown andGoetzmann 19. In Table5andsucceeding Tables,wereportbotht-statisticsfromcross-sectionalregressions 1995 1995, Malkiel,Carhart,1996,andElton,Gruber,DasBlake, 1996,EdwardsandPark, Hendricks, PatelandZeckhauser,Ibbotson, 1993,Goetzmann 1994,Brown andGoetzmann, ofUSmutualfundsbyhas beenstudiedinthecontext GrinblattandTitman,19881992, 18. Differentialskillwouldimply, among otherthings, persistenceofperformance.Thisissue Commodities wouldsuggest that thisclassification isnotvery useful. 17.The positivecorrelationoftheMultiObjectivecategory withallbenchmarksexcept this left-tail truncation. we donotrecordreturnsoffundsthatfailinmidyear, thereportedreturnsareupwardbiasedby 16.This resultisofcoursesubjecttothecaveatmentionedaboverelating tosurvivorship.Since together inthepastareidentifiedasagroup. proximity inpastreturnspace.Theappealing intuitionofthismethodisthatfundsmoved fund, thereturneachyear algorithm isavariable.Thus, theGSC groups fundsaccording totheir algorithm appliedtoannualdatausesfundreturnhistoriesasmulti-variateobservations:foreach and Fung andHsieh(1997)tocontrolforstyles effectsinrepeat-winneranalysis. TheGSC classes. Thisapproachdiffersfromthestyle analysis usedby Sharpe(1995),Ibbotson (1996) that sortmulti-variateobservationsintodiscreteclasses,conditionalonagiven numberof algorithm isageneralizationClassification [GSC] ofaclasswidely-used clustering algorithms forstyleGoetzmann [1997] classificationandobtainedsimilarresults.TheGeneralizedStylistic 15.Although not reportedhere,wealsousedastatisticalmethoddevelopedinBrown and scrutiny. isthedecisionbyexception somemajorfundmanagers toconcealtheirsuccessfrompublic the OffshoreFunds Directory. It isunlikely thatstrong positivereturnswouldgo unreported.An source ofconditioning forreturncalculations.Fundsoccasionally failtoreportannualresults without returndataarenotincludedinthecalculation.Thisis,ofcourse,anotherpossible thenumberoffunds,19,forwhichwehavereturndatainfirstyear.This explains Funds 36 For an electronic copy of this paper, please visit: http://ssrn.com/abstract=2307 the QuotaFund earnedareturnof-12.3%. for theyear 1994.In thatyear, theQuantumEmerging GrowthFund earnedareturnof-16%,and four years. Relative totheir self described style benchmark they all report positive returns except database fortheentireperiodofsample,whereasotherfundsarepresentinonly thelast Fund N.V.,QuasarInternational Fund N.V.andQuota Fund N.V. QuantumFund isinthe 23.There arefourSorosfundsinthedatabase,QuantumEmerging GrowthFund N.V.,Quantum statistically significant. of .023,again supporting theconclusionthatpatternofrepeatedlossesforthiscategory is In addition,thelog-odds ratiofor“Fund ofFunds” relativetothestyle benchmarkhadap-value 19.98 (3d.f.)relativetothemedianmanager, and83.82(3d.f.)relativetothestyle benchmark. significant, withaChi-squarevalueof7.88(3d.f.).Thefor“Fund ofFunds” was Loser-Loser, the positive persistence evident inthe “Event Driven” category ismarginally Winner-Loser,distribution acrossthefourcategories Loser-Winner ofWinner-Winner, and benchmarks, basedonp-valuesoflog-odds ratios.Using aChi-squaretestforrandom 22. Thereisnoevidenceofstatistically significant positive persistenceaftersubtractionofstyle 37