Survival, Look-Ahead Bias and the Persistence in Hedge Fund Performance
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, hedging (finance), liquidation, liquidity (economics), mutual funds, open-end investment funds, other financial vehicles, risk sharing|
|Series||ERIM Top-Core Articles|
|Journal||Journal of Financial and Quantitative Analysis|
Baquero, G, ter Horst, J.R, & Verbeek, M.J.C.M. (2005). Survival, Look-Ahead Bias and the Persistence in Hedge Fund Performance. Journal of Financial and Quantitative Analysis, 493–517. Retrieved from http://hdl.handle.net/1765/12614