By now, most hedge fund investors are aware that absolute, raw returns may not be the best way to judge a hedge fund manager.  Many believe that removing betas (whether they be “traditional” or “alternative”) from the equation can provide a more useful indication of manager ability.  For them, the question then becomes: did the manager beat their beta benchmark?

That much is generally agreed.  But for any given period, a large portion of managers beat their benchmarks and a large portion lag their benchmark.  In fact, if the benchmark is the average performance of all managers pursuing the same strategy then approximately half of all managers would beat the benchmark and half would lag it simply due to luck – not ability.

However, if the manager persistently finds herself on the winning side of the average, then one can likely conclude she has true ability.  Being on the winning side twice in a row may not say much.  But some managers appear to deliver returns that are as persistent as the sun rising every morning.  Thus was born the study of manager “persistence”.

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