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From Precy Dumlao, Opalesque Asia:
A study from BNP Paribas Hedge Fund Center at the Singapore Management University, and prepared by Melvin Teo, associate professor of Finance and director of the center, has concluded that performance persistence amongst hedge funds remains sparse despite the widely held belief among investors that hedge fund managers possess skill.
In his report titled: "Predicting hedge fund performance with style," Teo advised investors put additional premium on due diligence and quantitative fund selection tools.
According to Teo, funds with high past alpha t-statistics outperform funds with low past alpha t-statistics by 4.53% per year after adjusting for risk. The results cannot be explained by database biases, fund fees, or thin trading-induced serial correlation.
He said that the dismal performance in 2008 of several large and hitherto successful hedge funds, including Tudor, Renaissance, Citadel, and Och-Ziff, has shaken investors' belief in the value of active management. Moreover, extant empirical studies have not been kind to hedge funds.
In his study, Teo argued that it was very difficult to understand the persistence of hedge fund performance because of the complexities of strategies and the way performance is measured. Some fund managers dismiss the endogenous benchmark approach which he said is more significant. He cited four reasons this observation:
"First, hedge funds have significant latitude w...................... To view our full article Click here
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