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

G. Baquero, Jenke ter Horst and Marno Verbeek

ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam

Abstract: Hedge funds databases are typically 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 a.ect 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 quite severe, even though positive and negative survival-related 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.

Keywords: hedge funds; individual profiles; investments; performance measurement; survival (search for similar items in EconPapers)
JEL-codes: G13 G3 G31 M M41 (search for similar items in EconPapers)
Date: 2002-11-19
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Citations: View citations in EconPapers (2)

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Journal Article: Survival, Look-Ahead Bias, and Persistence in Hedge Fund Performance (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:ems:eureri:255

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