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The Road Less Traveled: Strategy Distinctiveness and Hedge Fund Performance

Zheng Sun1; Ashley Wang; Lu Zheng

1 Paul Merage School of Business, University of California at Irvine

Review of Financial Studies 2012

We investigate whether skilled hedge fund managers are more likely to pursue unique investment strategies that result in superior performance. We propose a measure of the distinctiveness of a fund's investment strategy based on historical fund return data. We call the measure the “Strategy Distinctiveness Index” (SDI). We document substantial cross-sectional variations as well as strong persistence in SDI. Our main result indicates that, on average, a higher SDI is associated with better subsequent performance. After adjusting for risk, funds in the highest SDI quintile outperform funds in the lowest quintile by 3.5% in the subsequent year.

DOI
10.1093/rfs/hhr092
Volume
25 (1)
Pages
96-143
Language
en
Export
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