Hedge Fund Performance: What Do We Know?
University of Oulu ; Imperial College Business School, Centre for Hedge Fund Research
Imperial College Business School; University of Oxford, Oxford-Man Institute of Quantitative Finance
University of Oulu
October 25, 2013
This paper shows that several previously documented stylized facts about hedge fund performance are sensitive to database selection and associated biases. Based on a novel database aggregation, we show that qualitative and quantitative differences in conclusions about average performance stem from database differences in the coverage of dead funds, backfill bias as well as the completeness of assets under management information. Once database selection biases are carefully accounted for, we find, in contrast to earlier studies, that fund share restrictions (or proxies for illiquidity), are not associated with higher fund performance while hedge funds with greater managerial incentives typically outperform. Investors that consider chasing returns, should heed our finding that there is no performance persistence for certain rebalancing frequencies and databases when equal-weighting funds. Drawing on our results and a detailed appendix that describes our database aggregation, we make three recommendations to hedge fund database users and researchers about hedge fund database selection, construction and comparison.
Number of Pages in PDF File: 86
Keywords: Hedge fund performance, persistence, sample selection bias, managerial skill
JEL Classification: G11, G12, G23working papers series
Date posted: January 22, 2012 ; Last revised: December 3, 2013
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