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Fund liquidation, self-selection and look-ahead bias in the hedge fund industry

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  • ter Horst, J.R.
  • Verbeek, M.J.C.M.

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.

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File URL: http://repub.eur.nl/pub/1822/ERS%202004%20104%20F&A.pdf
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Bibliographic Info

Paper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam in its series ERIM Report Series Research in Management with number ERS-2004-104-F&A.

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Date of creation: 10 Dec 2004
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Handle: RePEc:ems:eureri:1822

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Postal: RSM Erasmus University & Erasmus School of Economics, PoBox 1738, 3000 DR Rotterdam
Phone: 31-10-408 1182
Fax: 31-10-408 9020
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Web page: http://www.erim.eur.nl/
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Related research

Keywords: Hedge funds; look-ahead bias; performance persistence; self-selection; survival;

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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," NBER Working Papers 9275, National Bureau of Economic Research, Inc.
  2. 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.
  3. 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.
  4. 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.
  5. Daniel Capocci, 2002. "An Analysis of Hedge Fund Performance," Finance 0210001, EconWPA.
  6. 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.
  7. 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.
  8. 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.
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Cited by:
  1. 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).
  2. Jackwerth, Jens Carsten & Kolokolova, Olga & Hodder, James E., 2008. "Recovering Delisting Returns of Hedge Funds," MPRA Paper 11641, University Library of Munich, Germany, revised 31 Oct 2008.

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