Hedge Fund Attrition, Survivorship Bias, and Performance: Perspectives from the Global Financial Crisis
39 Pages Posted: 17 Mar 2010
Date Written: February 12, 2010
The impact of the global financial crisis since 2007 has been deep and broad, blanketing the financial and economic landscape and hammering the hedge fund industry. Using both active and inactive hedge fund return data from the CISDM database from January of 1994 to March of 2009, we measure survivorship bias, account for attrition rates, estimate a multi-factor model to explain hedge fund performance, and conduct a cross-sectional probit analysis to predict hedge fund attrition during the crisis. Following prior research, we surprisingly do not find survivorship bias to be prevalent during the global financial crisis. Moving a step beyond the literature, however, we identify a hidden survivorship bias attributed to the lack of reporting during the final months of the eventual demise of a fund. We also find unprecedented attrition rates, along with record declines in assets under management and fund closures during the crisis. Using a multi-factor model with both linear and nonlinear risk factors, we find four structural breaks in the data: October of 1998, April of 2000, March of 2003, and February of 2007. Estimating the model for each of the five sub-periods and for the entire period, we find that hedge fund returns can be explained by the linear risk factors (such as the three factors of Fama and French model, the change in credit spread, and the term structure spread) and the non-linear trend-following risk factors of Fung and Hsieh (2001). The evidence also indicates that the average hedge fund manager did not deliver a significantly positive alpha during the crisis. In addition, the cross-sectional probit results reveal that the more seasoned the fund, the higher its pre-crisis return performance, and the more regularly audited its books, the lower was its probability of attrition during the crisis.
Keywords: Hedge Funds, Attrition, Survivorship Bias, Performance, Financial Crisis
JEL Classification: G11, G12
Suggested Citation: Suggested Citation