Journal of Financial and Quantitative Analysis

Research Article

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

Guillermo Baqueroa1, Jenke ter Horsta2 and Marno Verbeeka3

a1 gbaquero@rsm.nl, RSM Erasmus University, P.O. Box 1738, 3000 DR Rotterdam, Netherlands

a2 mverbeek@rsm.nl, RSM Erasmus University, P.O. Box 1738, 3000 DR Rotterdam, Netherlands

a3 j.r.terhorst@uvt.nl, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, Netherlands.

Abstract

We analyze the performance persistence in hedge funds taking into account look-ahead bias (multi-period sampling bias). We model liquidation of hedge funds by analyzing how it depends upon historical performance. Next, we use a weighting procedure that eliminates look-ahead bias in measures for performance persistence. In contrast to earlier results for mutual funds, the impact of look-ahead bias is exacerbated for hedge funds due to their greater level of total risk. At the four-quarter horizon, look-ahead bias can be as much as 3.8%, depending upon the decile of the distribution. We find positive persistence in hedge fund quarterly returns after correcting for investment style. The empirical pattern at the annual level is also consistent with positive persistence, but its statistical significance is weak.

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