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Survival, Look-Ahead Bias and the Performance of Hedge Funds

27 Pages Posted: 21 Mar 2002  

Guillermo Baquero

ESMT European School of Management and Technology

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: February 28, 2002

Abstract

Hedge funds databases are typically subject to high attrition rates because of fund termination and self-selection. Even when all funds are included up to their last available return, one cannot prevent that ex post conditioning biases affect standard estimates of performance persistence. In this paper we analyze the persistence in the performance of U.S. hedge funds taking into account look-ahead bias (multi-period sampling bias). To do so, we model attrition of hedge funds and analyze how it depends upon historical performance. Next, we use a weighting procedure that eliminates look-ahead bias in measures for performance persistence. The results show that the impact of look-ahead bias is quite severe, even though positive and negative survival-related biases are sometimes suggested to cancel out.

Keywords: hedge funds, survival, look-ahead bias, performance measurement

JEL Classification: G11, G12, G23

Suggested Citation

Baquero, Guillermo and ter Horst, Jenke and Verbeek, Marno, Survival, Look-Ahead Bias and the Performance of Hedge Funds (February 28, 2002). EFMA 2002 London Meetings; EFA 2002 Berlin Meetings Discussion Paper. Available at SSRN: https://ssrn.com/abstract=302651 or http://dx.doi.org/10.2139/ssrn.302651

Guillermo Baquero (Contact Author)

ESMT European School of Management and Technology ( email )

Schlossplatz 1
10117 Berlin
Germany

Jenke R. Ter Horst

TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

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

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