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

Published online by Cambridge University Press:  06 April 2009

Guillermo Baquero ,
Jenke ter Horst  and
Marno Verbeek
Guillermo Baquero
Affiliation:
gbaquero@rsm.nl, RSM Erasmus University, P.O. Box 1738, 3000 DR Rotterdam, Netherlands
Jenke ter Horst
Affiliation:
mverbeek@rsm.nl, RSM Erasmus University, P.O. Box 1738, 3000 DR Rotterdam, Netherlands
Marno Verbeek
Affiliation:
j.r.terhorst@uvt.nl, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, Netherlands.
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 40 , Issue 3 , September 2005 , pp. 493 - 517
Copyright
Copyright © School of Business Administration, University of Washington 2005

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