Hedge Funds: The Good, the Bad, and the Lucky
Year: 2017
Type: article
Abstract: We develop an estimation approach based on a modified EM algorithm and a mixture of Normal distributions associated with skill groups to assess performance in hedge funds. By allowing luck to affect both skilled and unskilled funds, we estimate the number of skill groups, the fraction of funds from each group, and the mean and variability of skill within each group. For each individual fund, we propose a performance measure combining the fund’s estimated alpha with the cross-sectional distribution of fund skill. In out-of-sample tests, an investment strategy using our performance measure outperforms those using estimated alpha and t-statistic.
Authors: Yong Chen, Michael Cliff, Haibei Zhao
Institutions: Texas A&M University, Georgia State University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3124684802