Hedge funds have been billed as the best performing asset class over 10 years. But is that really the case? Barclays Capital says "no" — hedge fund indices are being overstated by from 1-6% a year depending on the index due to the way that that the statistics have been compiled….
Even an overstatement of 1 per cent per year would mean that hedge funds — billed as the best-performing asset class over ten years — had in fact been outpaced by shares.
If it were 6 per cent, it would mean that hedge funds were in fact producing less than half the annual investment returns of 11 to 12 per cent routinely claimed for them.
Tim Bond, author of the highly regarded Equity Gilt Study, said: “If you take some indices at face value, you are getting a flattering picture of the industry.” Some investors could be misled, he said.
However, he emphasised that, after taking account of these biases, hedge fund managers were still worth their high fees because performance was down to skill and not just market movements.
Barclays outlined a series of methodological failings by index compilers, including survivorship bias — the tendency to ignore funds as soon as they close or fail. This alone added between 2 and 4 per cent a year to index performance figures, according to academic studies, Barclays said….
Barclays said returns were also exaggerated because of selection bias, the result of some hedge fund managers choosing not to report figures, especially when they have performed poorly.
A third problem was known as instant history bias: funds tend to wait for a period of strong performance before publishing their figures and entering an index. This strong performance is then backdated into the index….
Hedge fund returns ‘are vastly overstated’ – Times Online UK
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