Fund Liquidation, Self-Selection and Look-Ahead Bias in the Hedge Fund Industry

Review of Finance, Vol. 11, pp. 605-632, May 2007

Posted: 20 Mar 2008  

Jenke ter Horst

TIAS School for Business and Society

Marno Verbeek

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM); Netspar

Date Written: May 2007

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.

Keywords: hedge funds, performance persistence, look-ahead bias, fund survival

JEL Classification: G11, G23, G14

Suggested Citation

ter Horst, Jenke and Verbeek, Marno, Fund Liquidation, Self-Selection and Look-Ahead Bias in the Hedge Fund Industry (May 2007). Review of Finance, Vol. 11, pp. 605-632, May 2007. Available at SSRN: https://ssrn.com/abstract=1108310

Jenke R. Ter Horst

TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

Marno Verbeek (Contact Author)

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2790 (Phone)

HOME PAGE: http://www.rsm.nl/mverbeek

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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