Welcome to the Dark Side - Hedge Fund Attrition and Survivorship Bias over the period 1994-2001
AbstractHedge funds exhibit a high rate of attrition that has increased substantially over time. Using data over the period 1994-2001, we show that lack of size, lack of performance and an increasingly aggressive attitude of old and new fund managers alike are the main factors behind this. Although attrition is high, survivorship bias in hedge fund data is quite modest, which reflects the relatively small difference in performance between surviving and defunct funds. Concentrating on survivors only will overestimate the average hedge fund return by around 2% per annum. For small, young, and leveraged funds, however, the bias can be as high as 4-6%. We also find significant survivorship bias in estimates of the standard deviation, skewness and kurtosis of individual hedge fund returns. When not corrected for, this will lead investors to seriously overestimate the benefits of hedge funds. We find fund of funds attrition to be much lower than for hedge funds. Combined with a small difference in performance between surviving and defunct funds of funds, this yields relatively low survivorship bias estimates for funds of funds.
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Bibliographic InfoPaper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2002-02.
Length: 33 pages
Date of creation: Dec 2001
Date of revision: Jan 2002
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New York University, Leonard N. Stern School Finance Department Working Paper Seires
99-077, New York University, Leonard N. Stern School of Business-.
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- Wilkens, Marco & Yao, Juan & Jeyasreedharan, Nagaratnam & Oehler, Patrick, 2013. "Measuring the performance of hedge funds using two-stage peer group benchmarks," Working Papers 2013-18, University of Tasmania, School of Economics and Finance, revised 01 Jun 2013.
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