Hedge Fund Characteristics and Performance Persistence: Evidence from 1996–2006

This paper investigates the association between selected hedge fund characteristics and persistence in both positive and negative abnormal returns using data from the TASS database between 1996 and 2006. I find that higher fund age, size and illiquidity, after controlling for risk, generate stronger persistence in both short- and long-term positive abnormal returns, or good performance. Therefore, these features appear to signal superior managerial and/or fund skill. Furthermore, funds with higher incentive fees display greater long-run persistence in both good and bad performance, net of fees. These results suggest that incentive fees are increased by both skilled and unskilled, but lucky, funds following good past performance.