Identifying Hedge Fund Skill by Using Peer Cohorts

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

    Research output: Contribution to journalArticlepeer-review

    4 Citations (Scopus)

    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
    DOIs
    Publication statusPublished - 2021

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