A wide range of empirical biases hampers hedge fund databases. In this paper we focus upon survival-related biases and disentangle look-ahead biases due to self-selection of funds and due to fund termination. Self-selection arises because funds voluntarily report their information to data vendors and may decide to stop doing so. By extending existing methodology, we analyze persistence in hedge fund performance over the period 1994–2000, taking into account the above biases. The results show that look-ahead biases due to liquidation and self-selection enforce each other and may lead to overestimating expected returns by as much as 8% per year. Overall, the results are consistent with positive persistence in hedge fund returns at horizons of two and four quarters

empirical bias, hedge funds, look-ahead bias
Portfolio Choice; Investment Decisions (jel G11), Information and Market Efficiency; Event Studies (jel G14), Pension Funds; Other Private Financial Institutions (jel G23)
dx.doi.org/10.1093/rof/rfm012, hdl.handle.net/1765/12676
ERIM Article Series (EAS)
Review of Finance (Print)
Erasmus Research Institute of Management

ter Horst, J.R, & Verbeek, M.J.C.M. (2007). Fund Liquidation, Self-selection, and Look-ahead Bias in the Hedge Fund Industry. Review of Finance (Print), 11(4), 605–632. doi:10.1093/rof/rfm012