While hedge funds are known to outperform the markets, earlier studies have repeatedly shown they rarely do for a protracted period of time. But a new report, by the National Bureau of Economic Research, to be issued this month, shows that many of them do, in fact, beat the markets for a long period of time, The New York Times reports.
The authors of the study -- Northwestern University finance professor Ravi Jagannathan, University of Arkansas assistant finance professor Alexey Malakhov, and Goldman Sachs equity derivatives associate Dmitry Novikov--maintain that earlier reports on hedge fund performance are flawed. While it is true that the performance of hedge funds is skewed upwards many times due to poorly performing hedge funds liquidating, the same is also true of highflyers, which frequently close their doors to new investors and are thereby likewise omitted from performance databases.
The researchers concluded that hedge funds that closed their doors to new investors because of a flood of new assets, continued to perform strongly after doing so. They found that for every 1% that a hedge fund beat its benchmark over a three-year period, it continued to outperform that benchmark by an average of 57 basis points over the next three years. In fact, Jagannathan said, mutual funds that outperform their benchmarks continue to do so only for another 12 months, and they then tend to trail that benchmark thereafter.
The reason hedge funds can deliver better performance, he said, is because they view investments long term, whereas mutual fund portfolio managers are more focuse don the short term.