A Reality Check on Hedge Funds Returns

Nolke Posthuma, Pieter Jelle van der Sluis

Research output: Working paperProfessional

Abstract

In this article we examine the backfill bias or instant history bias for hedge funds using additional information from the Tass database. This is information about the exact date a hedge fund starts to reporting to Tass. Using this information we are able to reveal the length of the instant histories. We find these to be just over 3 years on average. This number is far greater than previously documented. More than half of the recorded returns in the database are backfilled. The magnitude of the overall backfill bias is about 4 percent per annum on average. Again this number exceeds all previous estimates of the backfill bias we are aware of. We elaborate further across different time periods styles. Next, we eliminate backfilled returns and use survivorship free data to create a universe in which we could invest in real time. We introduce an investor who invests an equal amount in each fund that is in the universe. Conditional on this investment strategy our results indicate that the backfill bias is underestimated, and has a substantial downward effect on the returns across most hedge fund styles and is consistent over time for the whole sample. We have no reasons to believe that our conclusions are limited to the Tass database.
Original languageEnglish
Place of PublicationAmsterdam
PublisherFaculty of Economics and Business Administration, Vrije Universiteit Amsterdam
Publication statusPublished - 2003

Publication series

NameResearch Memorandum
No.2003-17

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Hedge funds
Reality check
Data base
Investors
Investment strategy

Cite this

Posthuma, N., & van der Sluis, P. J. (2003). A Reality Check on Hedge Funds Returns. (Research Memorandum; No. 2003-17). Amsterdam: Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam.
Posthuma, Nolke ; van der Sluis, Pieter Jelle. / A Reality Check on Hedge Funds Returns. Amsterdam : Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam, 2003. (Research Memorandum; 2003-17).
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Posthuma, N & van der Sluis, PJ 2003 'A Reality Check on Hedge Funds Returns' Research Memorandum, no. 2003-17, Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam, Amsterdam.

A Reality Check on Hedge Funds Returns. / Posthuma, Nolke; van der Sluis, Pieter Jelle.

Amsterdam : Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam, 2003. (Research Memorandum; No. 2003-17).

Research output: Working paperProfessional

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Posthuma N, van der Sluis PJ. A Reality Check on Hedge Funds Returns. Amsterdam: Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam. 2003. (Research Memorandum; 2003-17).