Hedge Fund Biases after the Financial Crisis

Kaiser, Dieter G.; Haberfelner, Florian

doi:10.2139/ssrn.1809570

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Hedge Fund Biases after the Financial Crisis

27 Pages Posted: 19 Apr 2011

See all articles by Dieter G. Kaiser

Dieter G. Kaiser

Robus Capital Management Limited; Frankfurt School of Finance & Management

Florian Haberfelner

affiliation not provided to SSRN

Date Written: April, 14 2011

Abstract

In this paper, we explore how hedge fund database biases developed during the 2007-2009 financial crisis. Our 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 (2000), who argue that time series of funds of hedge funds should be less prone to some of the documented database biases. We use a sampling technique to create hedge fund portfolios, and we then compare them using fund of fund data. We find 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. We also find 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% p.a. 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.

Keywords: Hedge Funds, Survivorship Bias, Backfilling Bias, Liquidation Bias, Self-Selection Bias, Portfolio Opportunity Distributions, Sampling

JEL Classification: G2, G12, G31

Suggested Citation: Suggested Citation

Kaiser, Dieter G. and Haberfelner, Florian, Hedge Fund Biases after the Financial Crisis (April, 14 2011). Available at SSRN: https://ssrn.com/abstract=1809570 or http://dx.doi.org/10.2139/ssrn.1809570