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

Posted: 14 Jul 2008

See all articles by Jenke ter Horst

Jenke ter Horst

affiliation not provided to SSRN

Marno Verbeek

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

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: G11, G23, G14

Suggested Citation

Horst, Jenke ter and Verbeek, Marno, Fund Liquidation, Self-Selection, and Look-Ahead Bias in the Hedge Fund Industry. Review of Finance, Vol. 11, Issue 4, pp. 605-632, 2007, Available at SSRN: https://ssrn.com/abstract=1159304 or http://dx.doi.org/10.1093/rof/rfm012

Jenke ter Horst (Contact Author)

affiliation not provided to SSRN

Marno Verbeek

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
600
PlumX Metrics