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Performance Persistence in the Alternative Investment Industry

We construct an improved measure of skill among commodity trading advisors (CTAs) and hedge fund managers. The theoretical issues surrounding the possibility of internal leverage receive particular attention. The results strengthen previous findings that past performance, properly adjusted for risk, does give some indication of future performance. The statistical significance of the results is extreme, while the practical significance is moderate for CTAs and very great for hedge funds. Consequently, there should be noticeable rewards for implementing this criterion in portfolio construction by selecting traders with superior skill.