Survival, Look-Ahead Bias, and Persistence in Hedge Fund Performance
ESMT European School of Management and Technology
Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM); Netspar
Jenke Ter Horst
Tilburg University - Center for Economic Research (CentER)
Journal of Financial and Quantitative Analysis, Vol. 40, pp. 493-518, September 2005
We analyze the performance persistence in hedge funds taking into account look-ahead bias (multi-period sampling bias). We model liquidation of hedge funds by analyzing how it depends upon historical performance. Next, we use a weighting procedure that eliminates look-ahead bias in measures for performance persistence. In contrast to earlier results for mutual funds, the impact of look-ahead bias is exacerbated for hedge funds due to their greater level of total risk. At the four-quarter horizon, look-ahead bias can be as much as 3.8%, depending upon the decile of the distribution. We find positive persistence in hedge fund quarterly returns after correcting for investment style. The empirical pattern at the annual level is also consistent with positive persistence, but its statistical significance is weak.
Keywords: hedge funds, look-ahead bias, performance, persistence
JEL Classification: G14, G23Accepted Paper Series
Date posted: January 4, 2006
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo2 in 0.280 seconds