Abstract
Ph.D.
This thesis investigates the persistence of hedge fund managers’ skills, the optimality of
strategies they use to outperform consistently the market during periods of boom and/or
recession, and the market risk encountered thereby. We consider a data set of monthly
investment strategy indices published by Hedge Fund Research group. The data set spans
from January 1995 to June 2010. We divide this sample period into four overlapping sub-
sample periods that contain different economic market trends. We define a skilled
manager as a manager who can outperform the market consistently during two
consecutive sub-sample periods.
To investigate the presence of managerial skills among hedge fund managers we first
distinguish between outperformance, selectivity and market timing skills. We thereafter
employ three different econometric models: frequentist, Bayesian and fuzzy regression,
in order to estimate outperformance, selectivity and market timing skills using both linear
and quadratic CAPM. Persistence in performance is carried out in three different
fashions: contingence table, chi-square test and cross-sectional auto-regression technique.
The results obtained with the first two probabilistic methods (frequentist and Bayesian)
show that fund managers have skills to outperform the market during the period of
positive economic growth (i.e. between sub-sample period 1 and sub-sample period 3).
This market outperformance is due to both selectivity skill (during sub-sample period 2
and sub-sample period 3), and market timing skill (during sub-sample period 1 and sub-
sample period 2). These results contradict the EMH and suggest that the “market is not
always efficient,” it is possible to make abnormal rate of returns.However, the results obtained with the uncertainty fuzzy credibility method show that
dispite the presence of few fund managers who possess selectivity skills during bull
market period (sub-sample period 2 and sub-sample period 3), and market timing skills
during recovery period (sub-sample period 3 and sub-sample period 4); there is no
evidence of overall market outperformance during the entire sample period. Therefore the
fuzzy credibility results support the appeal of the EMH according to which no economic
agent can make risk-adjusted abnormal rate of return.
The difference in findings obtained with the probabilistic method (frequentist and
Bayesian) and uncertainty method (fuzzy credibility theory) is primarily due to the way
uncertainty is modelled in the hedge fund universe in particular and in financial markets
in general. Probability differs fundamentally from uncertainty: probability assumes that
the total number of states of economy is known, whereas uncertainty assumes that the
total number of states of economy is unknown. Furthermore, probabilistic methods rely
on the assumption that asset returns are normally distributed and that transaction costs are
negligible.