The Hedge Fund World - Reading the entrails of the dead funds

Wed Apr 16, 2008

Critics of the hedge fund industry have often put forward the view that, while the best funds in the business may be very good, the average performance – as measured by the hedge fund indices – is in reality not nearly so good as it appears. The argument they usually put forward rests on one key contention, namely that the average performance indices are contaminated by ‘survivorship bias’. While the average performer may look impressive as measured by the median in the distribution of returns, this does not fairly reflect the average return overall for investors, they argue. This is because the index ignores the major losses of the funds that blow up, the critics suggest, and because there is a ‘fat tail’ of ‘outliers’ at the bottom of the distribution of returns.

Leaving aside the fact that all indices – including those that...

ISSN: 2151-1845 / CDC10004H

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