WHEN Citadel, a Chicago-based hedge fund, was bleeding money during the global financial crisis, its boss, Ken Griffin, says CNBC, a broadcaster, parked a van outside its doors to chronicle its demise. Last year CNBC crowned Mr Griffin “King Ken”; in recent years he has done spectacularly well.

Such abrupt twists of fortune appear dramatic. In fact, they are predictable. Novus, an analytics firm, has crunched numbers from Hedge Fund Research, a data provider, to suggest that hedge-fund performance shares a trait boringly familiar from other forms of investment: funds that do poorly then do better, and outperformers then underperform. In other words, past performance is not a guide to future returns (see chart).

The study filters data for two periods: from June 1st 2008 to February 28th 2009, when equity and credit markets were crashing, and from March 1st 2009 until the end of 2015. The funds are anonymised but show plenty of Citadel-like cases. One fund that lost 91% during the crash returned an annualised 42% afterwards. Conversely, among the 93 funds that finished in the top decile during the crash, only three remained...Continue reading