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Fund Liquidation, Self-selection, and Look-ahead Bias in the Hedge Fund Industry

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  • Jenke Ter Horst
  • Marno Verbeek

Abstract

A wide range of empirical biases hampers hedge fund databases. In this paper we focus upon survival-related biases and disentangle look-ahead biases due to self-selection of funds and due to fund termination. Self-selection arises because funds voluntarily report their information to data vendors and may decide to stop doing so. By extending existing methodology, we analyze persistence in hedge fund performance over the period 1994-2000, taking into account the above biases. The results show that look-ahead biases due to liquidation and self-selection enforce each other and may lead to overestimating expected returns by as much as 8% per year. Overall, the results are consistent with positive persistence in hedge fund returns at horizons of two and four quarters. Copyright 2007, Oxford University Press.

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Bibliographic Info

Article provided by European Finance Association in its journal Review of Finance.

Volume (Year): 11 (2007)
Issue (Month): 4 ()
Pages: 605-632

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Handle: RePEc:oup:revfin:v:11:y:2007:i:4:p:605-632

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References

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  1. Jonathan B. Berk & Richard C. Green, 2002. "Mutual Fund Flows and Performance in Rational Markets," FAME Research Paper Series rp100, International Center for Financial Asset Management and Engineering.
  2. Agarwal, Vikas & Naik, Narayan Y., 2000. "Multi-Period Performance Persistence Analysis of Hedge Funds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(03), pages 327-342, September.
  3. Brown, Stephen J, et al, 1992. "Survivorship Bias in Performance Studies," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 553-80.
  4. Horst, J.R. ter & Verbeek, M.J.C.M., 1997. "Estimating short-run persistence in mutual fund performance," Discussion Paper 97.21, Tilburg University, Center for Economic Research.
  5. Stephen J. Brown, 2001. "Careers and Survival: Competition and Risk in the Hedge Fund and CTA Industry," Journal of Finance, American Finance Association, vol. 56(5), pages 1869-1886, October.
  6. Erik R. Sirri & Peter Tufano, 1998. "Costly Search and Mutual Fund Flows," Journal of Finance, American Finance Association, vol. 53(5), pages 1589-1622, October.
  7. Daniel Capocci, 2002. "An Analysis of Hedge Fund Performance," Finance 0210001, EconWPA.
  8. Fung, William & Hsieh, David A, 1997. "Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 275-302.
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Cited by:
  1. Jens Carsten Jackwerth & James E. Hodder & Olga Kolokolova, 2008. "Recovering Delisting Returns of Hedge Funds," CoFE Discussion Paper 08-09, Center of Finance and Econometrics, University of Konstanz.
  2. Agarwal, Vikas & Fos, Vyacheslav & Jiang, Wei, 2012. "Inferring reporting biases in hedge fund databases from hedge fund equity holdings," CFR Working Papers 10-08 [rev.], University of Cologne, Centre for Financial Research (CFR).

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