New ‘Stylised facts’ about Hedge Funds and Database Selection Bias

By highlighting economically important effects of database selection bias on previously documented results we aim to improve the ability of researchers in this literature to compare results across different studies. We carefully motivate and test a set of eight hypotheses regarding the impact of database selection biases on stylised facts. We document significant positive risk-adjusted performance of the average fund while differences in its magnitude are due to differences in fund size, domicile and data biases, but not differences in fund risk exposures. Measures of misreporting and return smoothing by funds are similar across different databases. Performance persistence results are sensitive to share restrictions, rebalancing frequency, fund size and weighting scheme as well as more pronounced biases in certain databases. Hedge funds with greater managerial incentives, smaller funds and younger funds outperform while multivariate analysis shows that funds imposing lockups do not deliver significantly higher risk-adjusted returns. Several stylised facts are sensitive to the choice of the database which highlights the importance of using a consolidated database that is more representative of the aggregate industry.