|
Buzzkill Profs: Hedge Funds
Do Half as Well as You Think
by
Michael P Regan
August 17, 2015 —
10:59 AM EDT
n
Here's Why Hedge
Funds Don't Perform All That Well
It's the dog days of summer, when
college professors are supposed to be doing nothing but mimeographing
their syllabus and mending the elbow patches on their blazers (or
whatever it is that they do in the summer.)
But that's not stopping some academics
from throwing shade, as the kids say, in the general direction of the
hedge fund industry.
Their study shows
that due to inherent biases in the way hedge-fund databases compile
results, the industry's returns have been about half as strong as they
appear. The average annualized return for the industry since 1996 goes
from 12.6 percent to 6.3 percent when the biases are removed from the
data, according to the paper.
The volatility of the funds increases
along with their maximum drawdowns. Also, measures of how the returns
data are distributed, known as kurtosis and skewness, also change
noticeably.
n
From:
"Hedge Funds: A Dynamic Industry
In Transition" by Mila Getmansky, Peter A. Lee and Andrew W. Lo.
(Yellow circles added for emphasis.)
(The researchers -- Mila
Getmansky
of the University of Massachusetts Amherst,
Andrew Lo
of the Massachusetts Institute of Technology and
Peter Lee
of Lo's firm AlphaSimplex Group -- used data from Lipper TASS, though
the same biases exist in other services. Bloomberg also compiles
hedge-fund results and maintains indexes of returns for various
strategies.)
The biases stem from the fact that hedge
funds
voluntarily
report results to these databases. The
main reason they cough up the data is for marketing purposes,
according to the paper, and funds generally begin contributing their
returns once they have results worth bragging about. And since the
funds include prior returns when they first enter the database, it
leads to a “backfill bias” or “instant history bias” that boosts the
average returns. (Hat tip to
CXO
Advisory
for spotting the study last week.)
Since funds can stop reporting to the
database at any time -- say, for example, if returns are terrible --
this can cause an "extinction bias." In 2014, they note, the
attrition rate rose to 26 percent in the database studied, suggesting
that either the number of hedge funds is declining or that fewer hedge
funds are choosing to report their returns.
After scrubbing the data in an attempt
to remove the biases, they conclude: "The historical data show that
hedge funds have not, on average, meaningfully outperformed
traditional portfolios of stocks and bonds after fees. On average,
once returns have been adjusted for various sampling biases, hedge
funds do not routinely generate double-digit returns."
At any rate, another thing this study
shows is that sometimes finance professors can have sharp elbows! No
wonder so many have patches on their blazers.
©
Bloomberg L.P. |
