Recent literature has found some evidence of performance persistence in hedge
funds. This study investigated whether this persistence varies with fund
characteristics, such as size and age. Previous research has found that funds
face capacity constraints, that investment flows chase past performance, and
that as funds age, they become more passively managed, which reduces the
likelihood of performance persistence as funds grow older and larger. Consistent
with this model, this study found that performance persistence is strongest
among small, young funds. A portfolio of these funds with prior good performance
outperformed a portfolio of large, mature funds with prior poor performance by
9.6 percent per year.