“Taken at face value, historic index figures suggest that even an average hedge fund manager can easily beat the stock market while taking less risk. Since 1990, a weighted index of hedge funds has returned around 12 percent annually — about four percentage points more than the returns for the Standard & Poor’s 500-stock index — with just half the volatility, according to Hedge Fund Research.
On closer inspection, these claims look suspect, Breakingviews says. Research published in late 2007 by the Princeton professor Burton G. Malkiel showed that many hedge funds simply stopped reporting results after they became embarrassing.”
“This problem of voluntary reporting adds to what is known as survivorship bias, by which poorly performing funds that shut down drop out of the index. Of course, index providers have tried to work out how to deal with flaws of this kind in indexing, the publication concedes.
The practice is not unique to hedge funds — aggregate figures for mutual funds and other assets can be similarly distorted, Breakingviews remarks. But, it says, the high mortality rates for hedge funds, which tend to die at roughly twice the rate of mutual funds on average, make the issue particularly acute.”
This one is so good I had to mention even though I am on a BonaResponds trip. It will definitely make it to class!