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

Posted: 4 Jan 2006  

Guillermo Baquero

ESMT European School of Management and Technology

Marno Verbeek

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

Jenke ter Horst

TIAS School for Business and Society

Abstract

We analyze the performance persistence in hedge funds taking into account look-ahead bias (multi-period sampling bias). We model liquidation of hedge funds by analyzing 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 much as 3.8%, depending upon the decile of the distribution. We find positive persistence in hedge fund quarterly returns 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, look-ahead bias, performance, persistence

JEL Classification: G14, G23

Suggested Citation

Baquero, Guillermo and Verbeek, Marno and ter Horst, Jenke, Survival, Look-Ahead Bias, and Persistence in Hedge Fund Performance. Journal of Financial and Quantitative Analysis, Vol. 40, pp. 493-518, September 2005. Available at SSRN: https://ssrn.com/abstract=873521

Guillermo Baquero

ESMT European School of Management and Technology ( email )

Schlossplatz 1
10117 Berlin
Germany

Marno Verbeek (Contact Author)

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

Jenke R. Ter Horst

TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

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