Tuesday, June 06, 2006

Where are the hot hedge funds?

Contrary to common wisdom, a new study says that many hedge funds can outperform their benchmarks consistently, according to published reports.

Studies that found that hedge funds performed strongly in a sprint but not for the long haul were flawed, says this study, because they failed to correct fully for statistical problems in databases of hedge fund returns.

According to "Do Hot Hands Persist Among Hedge Fund Managers? An Empirical Evaluation," the misconception comes from a "self-selection bias" whereby good performers close to new investors, stop reporting their performance and therefore vanish from the databases.

The study found funds closed to new investors as a result of good performance were more likely to be above-average performers in the period after they closed.

-- from investmentnews.com

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