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

G. Baquero, J.R. Ter Horst, M.J.C.M. Verbeek

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Abstract

Hedge funds databases are typicall subject to high attrition rates because of fund termination and self-selection.Even when all funds are included up to their last available return, one cannot prevent that ex post conditioning biases affect standard estimates of performance persistence.In this paper we analyze the persistence in the performance of U.S. hedge funds taking into account look-ahead bias (multi-period sampling bias).To do so, we model attrition 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.The results show that the impact of look-ahead bias is quitesevere, even though positive and negative survivalrelated biases are sometimes suggested to cancel out.At horizons of one and four quarters, we find clear evidence of positive persistence in hedge fund returns, also after correcting for investment style.At the two-year horizon, past winning funds tend to perform poorly in the future.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages29
Volume2002-111
Publication statusPublished - 2002

Publication series

NameCentER Discussion Paper
Volume2002-111

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Keywords

  • hedging
  • performance measurement
  • investment trusts

Cite this

Baquero, G., Ter Horst, J. R., & Verbeek, M. J. C. M. (2002). Survival, Look-Ahead Bias and the Persistence in Hedge Fund Performance. (CentER Discussion Paper; Vol. 2002-111). Finance.