Serge Patrick Amvella Motaze Wins the Award for Best Paper by a Doctoral Student from the Eastern Finance Association

Results of a study on evaluating the performance of hedge funds

May 20, 2009

PhD student Serge Patrick Amvella Motaze, specializing in Finance, has won the award for the Best Paper by a doctoral student for his article entitled Persistence Analysis of Hedge Funds Returns from the Eastern Finance Association. The award was presented at the Association’s annual conference, held recently in Washington.

Evaluating the performance of hedge funds

In his article, Serge Patrick presented the results of a study on evaluating the performance of hedge funds. In particular, he studied the presence of pure persistence in returns, “which makes it possible to evaluate the regularity with which a fund manager obtains absolute returns,” he explains.

Serge Patrick studied two forms of pure persistence: absolute persistence (positive/negative returns) and persistence with respect to the high water mark (the maximum value reached by an investment). Since the high water mark criterion looks at the amplitude of losses, it makes it possible to evaluate the regularity with which the manager increases the investor’s wealth.

Shedding light on the performance of hedge funds

The study showed, among other things, that smoothing apparently contributes to increasing absolute persistence, which leads to overestimation of the manager’s performance.

The study also shows that hedge fund managers show a relatively high probability of delivering positive returns, but a much weaker probably of increasing their high water mark (and hence the investor’s wealth). This is a consequence of the non-normal distribution of their returns. Thus an analysis of persistence with respect to the high water mark is a better indicator than an analysis of absolute persistence in evaluating hedge fund performance.

The winning article is based on work done as part of Serge Patrick’s doctoral thesis, co-directed by Professors Nicolas Papageorgiou and Iwan Meier, of the Department of Finance. He received funding from the Institut de finance mathématique de Montréal (IFM2), and is a researcher affiliated with the Groupe de recherche en placements alternatifs DGAM-HEC Montréal, looking into alternative investments.