Hedge fund biases after the financial crisis

Abstract

Purpose

The purpose of this paper is to explore how hedge fund database biases developed during the 2007‐2009 financial crisis.

Design/methodology/approach

The sample consists of 8,935 hedge funds from the Lipper TASS Hedge Fund Database for the January 2002‐September 2010 time period. The theoretical foundation of this paper draws from Fung and Hsieh who argue that time series of funds of hedge funds should be less prone to some of the documented database biases. The paper uses a sampling technique to create hedge fund portfolios, and then compares them using fund of fund data.

Findings

The paper finds empirical evidence that fund of hedge fund data is less biased than single hedge fund data, and that the impact of the survivorship and backfilling biases has increased since the financial crisis. It also finds that the attrition rate for hedge funds has nearly doubled since the financial crisis, and that an elevated attrition rate has a negative impact on the quality and representativeness of hedge fund data due to the liquidation bias. The liquidation bias increased strongly in the aftermath of the financial crisis. It also fluctuates over time, and it can account for an overestimate of performance of over 10 percent p.a.

Originality/value

Given this increase and the volatile nature of hedge fund biases, we believe investors (for benchmarking) and academics (for empirical studies) should consider refraining from using single hedge fund index data.

Citation

Kaiser, D. and Haberfelner, F. (2012), "Hedge fund biases after the financial crisis", Managerial Finance, Vol. 38 No. 1, pp. 27-43. https://doi.org/10.1108/03074351211188349