A Suggestion for Remedying the Overstated Performance of Non-Investable Hedge Fund Indices

The biases that inflate the performance of hedge funds have been well documented in the financial literature.

Author(s):

Survivorship bias, which results from the ex post exclusion of unsuccessful funds from databases, is clearly one of the greatest causes of grossly overstated performance. Considering the returns of surviving funds alone leads to a strong upward bias, according to recent studies (up to 442 basis points, as demonstrated by Malkiel and Saha [2005]). In the same vein, backfill bias or instant history bias, which occurs when the historical performance of a successful fund is suddenly and retroactively added (backfilled) into the database, also distorts the performance of the hedge fund industry (up to 435 basis points, as shown by Posthuma and van der Sluis [2004]). These biases are not negligible and tend primarily to inflate the returns posted by non-investable hedge fund indices; hence the recent development of investable hedge fund indices that can help investors mitigate the effects, which are never done away with entirely, of these biases.
Pdf
A Suggestion for Remedying the Overstated Performance of Non-Investable Hedge Fu...
(-1.00 B)
Type: EDHEC Publication
Date: le 21/10/2010
Extra information : For more information, please contact Joanne Finlay, EDHEC Research and Development Department [ joanne.finlay@edhec.edu ] The contents of this paper do not necessarily reflect the opinions of EDHEC Business School.
Research Cluster : Finance

See Also

Bond Portfolio Optimization in the Presence of Duration Constraints - EDHEC-Risk Institute research article in the Journal of Fixed Income
News
- 19-07-2018
We are pleased to enclose an EDHEC-Risk Institute research article published in the...
Lionel Martellini discussed ageing population: goal-based investing and its application to the retirement problem
News
- 10-07-2018
Lionel Martellini, Professor of Finance at EDHEC Business School and Director of EDHEC-...
[EDHEC Experience] Light on the first urban Lab of Latin America
News
- 09-07-2018
Wide Open: in the explorers' shoes The third stopover of the Wide Open project has been...
EDHECInfra Days: Infrastructure Investors need proper benchmarks
News
- 05-07-2018
Earlier this month we held the first EDHECinfra Days event in London, bringing together...