Survival, Look-Ahead Bias and the Persistence in Hedge Fund Performance

51 Pages Posted: 18 Jan 2003

See all articles by Guillermo Baquero

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: August 30, 2004

Abstract

In this paper we analyze the persistence in the performance of hedge funds taking into account look-ahead bias (multi-period sampling bias). To do so, we model liquidation 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. In contrast to earlier results for mutual funds, the impact of look-ahead bias is exacerbated for hedge funds due to their greater level of total risk. At the four quarter horizon, look-ahead bias can be as large as 3.8%, depending upon the decile of the distribution. At the quarterly level, we find positive persistence in hedge fund returns, also after correcting for investment style. The empirical pattern at the annual level is also consistent with positive persistence, but its statistical significance is weak.

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

JEL Classification: M, M41, G3, G13, G31

Suggested Citation

Baquero, Guillermo and ter Horst, Jenke R. and Verbeek, Marno, Survival, Look-Ahead Bias and the Persistence in Hedge Fund Performance (August 30, 2004). ERIM Report Series Reference No. ERS-2002-104-F&A, EFA 2003 Annual Conference Paper No. 567, Available at SSRN: https://ssrn.com/abstract=371051

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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