Hurst exponent: Measuring MF scheme performance consistency

Investors may have got advice every now and then to invest in only those funds that are consistent performers. However, what people miss out on while giving advice is how to find a fund that has a consistent performance!

Hurst exponent is a popular method to determine a fund’s performance amongst the buffet of tools available to evaluate the consistency of fund performance.    

Hurst exponent was originally developed by a hydrologist named Harold Edwin Hurst to study the long-term storage capacity of reservoirs. Consistency is measured by a scientific tool named Hurst exponent. It's a measure of long-term memory of time series. Hurst exponent helps you to understand the trend persistence of a scheme if it is trending, mean-reverting, or random series. If Hurst exponent of a fund is:

1. Between 0 and 0.5, it reflects the mean-reverting or anti persistent time series of returns.

2. Equal to 0.5 implies random walk time series. This is also referred to as a geometric Brownian motion.

3. Greater than 0.5 shows persistent time series.

The higher the value of the Hurst exponent, the more it shows the trendiness in the fund’s net asset value movement.

We computed the Hurst exponent of some of the large-cap dedicated funds on the basis of daily NAV. Most of them are showing that they walk randomly without any trend. Nevertheless, if we would have taken weekly or monthly series, it may or may not have found a trend.