The persistence of hedge fund strategies in different economic periods: A support vector machine approach

Abstract

This article researches two issues that are related to the hedge fund industry. The first is the statistical methodology used in the evaluation and prediction of hedge fund performance. As the returns of hedge funds are non-normal (suffer from fat tails), ordinary least squares (OLS) and other commonly used statistical methods may not reflect optimal results. Hence, this article introduces the use of support vector machines (SVM) to test and hence predict the performance of hedge fund strategies within different economic periods. The article also compares the SVM results with feedforward neural networks (NN) and OLS. The second issue is to investigate the ability of a specific hedge fund strategy to always outperform the average market during different economic periods. The results show that SVM has outperformed the NN analysis in its prediction accuracy. Moreover, those preliminary results show that the importance of hedge fund strategies varies (non-persistent) during different economic periods in affecting the monthly returns. However, the emerging markets trading strategy shows more persistence than other hedge fund strategies.

Hedge fund performance persistence under different business cycles and stock market regimes

“…Further, Glode et al (2009) show that fund returns are more predictable after periods of high stock market returns but not predictable after periods of low stock market returns. Similar results are reported by Abdou and Nasereddin (2011) when using a support vector machine approach. It is also important to distinguish between business cycles and stock market regimes, as they do not necessarily coincide, resulting in different implications for fund performance persistence.…”

Performance persistence of hedge fund: A result of different systematic risk exposure

“…Later studies moved further to investigate what factors affect the persistence in performance by using more complicated mythology. Abdou & Nasereddin, (2011) examined the performance persistence of some strategies for different economic periods using several methodologies. They find hedge fund returns performance related to different strategies was not persistent over the long-term.…”

“…Major areas of focus were hedge fund strategies, economic cycle and fund characteristics. Abdou & Nasereddin (2011) studied performance persistence according to hedge fund strategies in different economic periods. After employing several methodologies, they found that none of the samples showed long-term performance persistence.…”