Thursday, December 13, 2012

Poorly Performing Hedge Funds Do Not Report Results To Commercial Databases Leading To An Appearance Of Higher Average Investment Returns By Hedge Funds

Posted by Milton Recht:

From The Review Of Financial Studies, "Out of the Dark: Hedge Fund Reporting Biases and Commercial Databases" by Adam L. Aiken, Quinnipiac University, Christopher P. Clifford, University of Kentucky and Jesse Ellis, University of Alabama:

We examine the potential for selection bias in voluntarily reported hedge fund performance data. We construct a set of hedge fund returns that have never been reported to a commercial hedge fund database. These returns allow a direct comparison of performance between funds that choose to report to commercial databases and funds that do not. We find that funds that report their performance to commercial databases significantly outperform nonreporting funds. Our results suggest that the voluntarily reported performance in commercial databases suffers from a selection bias that may exaggerate the average skill of the universe of hedge fund managers.

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