Identifying Hedge Fund Skill by Using Peer Cohorts

David Forsberg, David R. Gallagher, Geoffrey J. Warren

Research output: Contribution to journalArticleResearchpeer-review

2 Citations (Scopus)
3 Downloads (Pure)

Abstract

We propose a cohort model that evaluates hedge funds against peer groups executing similar investment strategies formed by using return correlations. Our method improves the identification of skilled managers, as evidenced by a strong ability to explain hedge fund returns out-of-sample, with cohort alpha being more persistent than alpha based on the widely accepted seven-factor model. A hedge fund-of-funds analysis found significant performance enhancement from exposure to the best funds within each cohort. The cohort approach can be used to enhance the construction of hedge fund-of-funds portfolios by isolating strategy groupings as well as the best managers within each group.

Original languageEnglish
Pages (from-to)97-123
Number of pages27
JournalFinancial Analysts Journal
Volume77
Issue number2
Early online date2 Apr 2021
DOIs
Publication statusPublished - 2021
Externally publishedYes

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