I read a study a few years back which tried to quantify the different factors affecting asset raising for hedge funds (eg performance, conference appearances, white papers) and by far the strongest factor was past 24mo returns.https://twitter.com/M_C_Klein/status/1478081381360017411 …
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For the funds putting up the top/bottom returns it’s obviously mostly reversion to the mean. But beyond that I think there are two big things to consider: 1. higher AUM leading to underperformance esp if the firm raises assets too quickly and can’t deploy them well (eg liquidity,
market impact or style drift) and 2. persistence in manager skill — this mostly shows up in risk adjusted returns where some funds are consistently top quartile, but they tend to be closed or at least very careful about raising new assets, so you can’t
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really take advantage of it. Selling losers might work but you’re giving up your high water mark when you do that.
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