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A Reality Check on Hedge Funds Returns

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Author Info

  • Posthuma, Nolke

    (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics)

  • Sluis, Pieter Jelle van der

Abstract

In this article we examine the backfill bias or instant history bias for hedge funds using additional information from the Tass database. This is information about the exact date a hedge fund starts to reporting to Tass. Using this information we are able to reveal the length of the instant histories. We find these to be just over 3 years on average. This number is far greater than previously documented. More than half of the recorded returns in the database are backfilled. The magnitude of the overall backfill bias is about 4 percent per annum on average. Again this number exceeds all previous estimates of the backfill bias we are aware of. We elaborate further across different time periods styles. Next, we eliminate backfilled returns and use survivorship free data to create a universe in which we could invest in real time. We introduce an investor who invests an equal amount in each fund that is in the universe. Conditional on this investment strategy our results indicate that the backfill bias is underestimated, and has a substantial downward effect on the returns across most hedge fund styles and is consistent over time for the whole sample. We have no reasons to believe that our conclusions are limited to the Tass database.

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File URL: ftp://zappa.ubvu.vu.nl/20030017.pdf
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Bibliographic Info

Paper provided by VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics in its series Serie Research Memoranda with number 0017.

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Date of creation: 2003
Date of revision:
Handle: RePEc:dgr:vuarem:2003-17

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Web page: http://www.feweb.vu.nl

Related research

Keywords: Backfill bias; Hedge funds; Performance persistence; Self-selection bias;

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Citations

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Cited by:
  1. Tomáš Jeřábek, 2009. "Hedge Funds and Their Performance Between 1994 and 2008," Český finanční a účetní časopis, University of Economics, Prague, vol. 2009(1), pages 51-65.
  2. Auer, Benjamin R., 2014. "Should hedge funds be cautious reporting high returns?," Research in International Business and Finance, Elsevier, vol. 30(C), pages 195-201.
  3. Aragon, George O., 2007. "Share restrictions and asset pricing: Evidence from the hedge fund industry," Journal of Financial Economics, Elsevier, vol. 83(1), pages 33-58, January.
  4. Antonio Diez de los Rios & René Garcia, 2006. "Assessing and Valuing the Non-Linear Structure of Hedge Fund Returns," Working Papers 06-31, Bank of Canada.
  5. Geetesh Bhardwaj & Gary B. Gorton & K. Geert Rouwenhorst, 2008. "Fooling Some of the People All of the Time: The Inefficient Performance and Persistence of Commodity Trading Advisors," NBER Working Papers 14424, National Bureau of Economic Research, Inc.
  6. Arjen Siegmann & Denitsa Stefanova, 2011. "Market Liquidity and Exposure of Hedge Funds," Tinbergen Institute Discussion Papers 11-150/2/DSF27, Tinbergen Institute.
  7. Agarwal, Vikas & Fos, Vyacheslav & Jiang, Wei, 2010. "Inferring reporting biases in hedge fund databases from hedge fund equity holdings," CFR Working Papers 10-08, University of Cologne, Centre for Financial Research (CFR).
  8. Hoevenaars, Roy P.M.M. & Molenaar, Roderick D.J. & Schotman, Peter C. & Steenkamp, Tom B.M., 2008. "Strategic asset allocation with liabilities: Beyond stocks and bonds," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 2939-2970, September.
  9. Roger Ibbotson & Peng Chen, 2005. "The A,B,Cs of Hedge Funds: Alphas, Betas, and Costs," Yale School of Management Working Papers amz2597, Yale School of Management, revised 01 Sep 2005.

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