Performance Persistence

Performance Persistence - The gorgeous grand foyer of the Paris Opera House
Performance Persistence

The persistence of a fund performance represents the extent to which the fund manager is able to generate consistently performance over time. Namely, fund performance is said to persist when the fund belongs to the winner group (e.g., a superior performance lying above some estimated median performance level) over several periods of time.

Specifically, performance persistence captures two dimensions of fund management, namely the ability to generate excess return as compared to a given benchmark portfolio (e.g., manager skills such as market-timing ability and stock picking ability), and the ability to maintain performance over time (e.g., to do better than other competitive managers or to be outperforming through time).

There currently exists three approaches for measuring performance persistence, namely contingency tables (e.g., counting the number of time periods with outperforming returns), regression studies (assessing the impact of past fund alphas on current fund alphas), and finally funds’ ranking based on appropriate performance measures (e.g., appraisal ratio, modified Sharpe ratio, Park ratio, alternative investment risk-adjusted performance). In the light of the three approaches aforementioned, current academic and empirical research has identified and exhibited key features of performance persistence.

First, a short-term persistence up to 1 year has been acknowledged with stronger evidence up to a 3-month horizon. Indeed, some funds exhibit a short-term positive correlation in their respective abnormal returns (i.e., risk-adjusted returns or positive alphas) over subsequent time periods.

Second, the persistence of fund performance can be explained by a set of key security-based factors such as size (i.e., market capitalization), value, momentum (e.g., shortterm past performance), fees and expenses (e.g., management and incentive fees, performance fees, load charges, operating fees, transactions costs), and investment style (e.g., aggressive and/or conservative investments focusing on aggressive growth, growth, growth and income, balanced or income securities among others) as well as related style consistency.

Indeed, it is highly important to balance gross investment returns or gross excess returns with corresponding underlying investment expenses. For example, capitalization is negatively linked with hedge fund returns. Moreover, size and management fees are negatively linked with performance persistence.

Specifically, a persistent positive performance characterizes essentially funds with low management fees. Finally, funds with consistent investment style over time yield better absolute and relative performance. In general, style consistent funds also tend to manage portfolios with a low turnover (e.g., low transaction costs).

So far, poor performers are shown to persist over time whereas good performers can persist over time only due to a chance factor. Furthermore, performance persistence is conditional on the length of the time period under consideration.