We propose to evaluate an investment fund’s performance by the percentage of peers the fund outperforms and underperforms, after correction for luck. We call these measures the fund’s outperformance ratio and underperformance ratio. When applied to hedge funds, we find that fund size tends to increase the underperformance ratio, but the effect is lower for funds with a longer track record. Our results also indicate that the outperformance ratio is a better predictor of future fund performance than alternative peer performance measures, and that, the best forecast performance is obtained when combining the outperformance ratio with a relative or peer alpha measure.

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