On the underestimation of risk in hedge fund performance persistence: geolocation and investment strategy effects

Klubinski, William and Verousis, Thanos (2021) On the underestimation of risk in hedge fund performance persistence: geolocation and investment strategy effects. In: Financial Risk Management and Modeling. Risk, Systems and Decisions . Springer, Cham, Switzerland, pp. 265-293. ISBN 9783030666903, 9783030666910

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Abstract

Despite the exponential increase in the literature related to the performance of Alternative Investment Funds (AIFs), risk management with respect to the measurement of performance persistence remains largely unexplored. In this paper, we investigate the impact of geolocation and investment strategy effects on the estimation of risk in performance persistence measurement dynamics. This aspect of risk in performance persistence is crucial as it allows us to show the combined effects of geolocation and investment strategy choice on risk-adjusted performance persistence. We report strong performance persistence when analysing the individual domicile or strategy. However, as we move to consider a combination of both domicile and the investment strategy, we can observe diminished persistence as well as its loss and reversal. The results of our cross-comparison show that the sole reliance on the individual domicile/investment strategy focused clusters can be grossly misleading and lead to capital losses.

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