Persistent doubt: An examination of the performance of hedge funds

Abstract

We examine whether performance persistence is suspicious. Top quintile portfolios formed on the Sharpe ratio, the alpha and the information ratio persistently outperform similarly constructed mediocre third quintile portfolios throughout our sample period but performance is more modest and less persistent when forming portfolios on the Excess Manipulation Proof Performance Measure (EMPPM). In selecting funds according to the ranking by the Sharpe and the information ratio, investors are also selecting funds that have persistently doubtful performance according to the doubt ratio. In contrast, portfolios formed on the alpha and especially the EMPPM have much less excess and persistent doubt.