Fund Liquidation, Self-Selection and Look-Ahead Bias in the Hedge Fund Industry
Jenke ter Horst
Tilburg University - Center for Economic Research (CentER)
Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM); Netspar
Review of Finance, Vol. 11, pp. 605-632, May 2007
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.
Keywords: hedge funds, performance persistence, look-ahead bias, fund survival
JEL Classification: G11, G23, G14
Date posted: March 20, 2008
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