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

Jenke ter Horst · Marno Verbeek

82 citations0/0 files storedEuropean Finance Review

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Financial Markets and Investment Strategies Financial Risk and Volatility Modeling Private Equity and Venture Capital

Abstract

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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References

1997On Persistence in Mutual Fund Performance 1998Costly Search and Mutual Fund Flows 2004Mutual Fund Flows and Performance in Rational Markets 1995Returns from Investing in Equity Mutual Funds 1971 to 1991 1997Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds 2002Mutual Fund Flows and Performance in Rational Markets 1992Survivorship Bias in Performance Studies 1999The Performance of Hedge Funds: Risk, Return, and Incentives

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2012The Life Cycle of Hedge Funds: Fund Flows, Size, Competition, and Performance 2010Survivorship Bias and Mutual Fund Performance: Relevance, Significance, and Methodical Differences 2015Hedge Funds: A Dynamic Industry in Transition 2015The Economics and Finance of Hedge Funds: A Review of the Academic Literature 2022Hedge Fund Flows and Performance Streaks:How Investors Weigh Information 2014Recovering Delisting Returns of Hedge Funds

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