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Welcome to the Dark Side: Hedge Fund Attrition and Survivorship Bias over the Period 1994-2001

40 Pages Posted: 17 Dec 2001  

Harry M. Kat

Independent

Gaurav S. Amin

Albourne Partners; University of Reading - ICMA Centre

Date Written: December 11, 2001

Abstract

Hedge funds exhibit a high rate of attrition that has increased substantially over time. Using data over the period 1994-2001, we show that lack of size, lack of performance and an increasingly aggressive attitude of old and new fund managers alike are the main factors behind this. Although attrition is high, survivorship bias in hedge fund data is quite modest, which reflects the relatively small difference in performance between surviving and defunct funds. Concentrating on survivors only will overestimate the average hedge fund return by around 2% per annum. For small, young, and leveraged funds, however, the bias can be as high as 4-6%. We also find significant survivorship bias in estimates of the standard deviation, skewness and kurtosis of individual hedge fund returns. When not corrected for, this will lead investors to seriously overestimate the benefits of hedge funds. We find fund of funds attrition to be much lower than for hedge funds. Combined with a small difference in performance between surviving and defunct funds of funds, this yields relatively low survivorship bias estimates for funds of funds.

Keywords: Hedge fund, attrition, survivorship bias

JEL Classification: G00

Suggested Citation

Kat, Harry M. and Amin, Gaurav S., Welcome to the Dark Side: Hedge Fund Attrition and Survivorship Bias over the Period 1994-2001 (December 11, 2001). Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=293828 or http://dx.doi.org/10.2139/ssrn.293828

Harry M. Kat (Contact Author)

Independent

No Address Available

Gaurav S. Amin

Albourne Partners ( email )

16 Palace Street
London, SW1E 5JD
United Kingdom
02073467000 (Phone)

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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