英國對沖基金相對的性能
The Performance Of Hedge Fund Relatively In UK

對沖基金正在積極管理的投資組合持有頭寸公開交易的證券。Gaurav阿明和哈利·m·凱特(2000)在他們的報(bào)告中說,“對沖基金通常定義為一個(gè)私人組織集合投資工具,由專業(yè)投資經(jīng)理管理,而不是向公眾普及”。它指控績效費(fèi)和管理費(fèi)。它允許少量的大型投資者(通常是最低投資額是100萬美元)可以使用高風(fēng)險(xiǎn)技術(shù)做一個(gè)靈活的投資。1現(xiàn)在很明顯,在另類投資共同基金的問題上表現(xiàn)不是很良好。一個(gè)絕對回報(bào)高,通常有障礙率和獎(jiǎng)勵(lì)費(fèi)等特性與高水準(zhǔn)的提供對沖基金更好的對齊管理者和投資者的利益。2此外共同基金通常使用只做一種多頭“買入并持有”策略標(biāo)準(zhǔn)的資產(chǎn)類別,這有助于捕捉風(fēng)險(xiǎn)溢價(jià)與股票的風(fēng)險(xiǎn),利率風(fēng)險(xiǎn)、違約風(fēng)險(xiǎn)等。然而,他們不是非常有助于捕捉風(fēng)險(xiǎn)溢價(jià)與動(dòng)態(tài)交易策略。這就是為什么對沖基金進(jìn)入畫面。

在2009年,在接下來的世紀(jì)，這需要世界上最偉大的歷史。在2008年世界看到世界經(jīng)濟(jì)最大的下降。很多人丟失他們的工作,很多公司都停止。世界經(jīng)濟(jì)面臨著歷史上最高的損失。這些所有的因素都只顯示一種改造的最大對沖的垮臺(tái)。3過去幾十年見證了一個(gè)快速增長的對沖基金。相對傳統(tǒng)投資組合對沖基金表現(xiàn)出一些獨(dú)特的特征,對他們持有證券的類型和位置的類型來說它們是靈活的。

1.1-Introduction:——簡介

Hedge funds are actively managed portfolios that hold positions in publicly traded securities. Gaurav S. Amin and Harry M. Kat (2000) stated on their report that “A hedge fund is typically defined as a pooled investment vehicle that is privately organized, administrated by professional investment managers, and not widely available to the public”. It charges both a performance fee and a management fee. It allows a flexible investment for a small number of large investors (usually the minimum investment is $1 million) can use high risk techniques. 1Now days it is very clear that in the matter of alternative investment mutual fund is not performing well. As a high absolute returns and typically have features such as hurdle rates and incentive fees with high watermark provision hedge fund gives a better align to the interests of managers and investors. 2Moreover mutual funds typically use a long-only buy-and-hold type strategy on standard asset classes, which help to capture risk premia associate with equity risk, interest rate risk, default risk etc. However, they are not very helpful in capturing risk premia associate with dynamic trading strategies. That is why hedge fund comes into the picture.

In the year of 2009, this takes the greatest history of the world in the following century. In the year of 2008 the world saw the greatest fall down of the world economy. Lots of people missing their jobs, lots of company were stopped. The world economy faced the highest losses in the history. These all factors are showing only one way to makeover from that greatest downfall that is hedging. 3The last couple of decades have witnessed a rapidly growing in the hedge funds. Relative to traditional investment portfolios hedge funds exhibit some unique characteristics; they are flexible with respect to the types of securities they hold and the type of the position they take.#p#分頁標(biāo)題#e#

1 Agarwal, V. and Naik, N. (2000). “Multi-period performance persistence analysis of hedge fund s”. The journal of financial and quantitative analysis. Vol. 35, No,3. PP-327.

2 Agarwal, V. and Naik, N. (2004). “Risks and portfolio decisions involving hedge funds”. The review of financial studies, Vol. 17, No.1. PP-64.

3 Journal of banking and finance 32(2008) 741-753- “Hedge Fund Pricing and Model Uncertainty” by Spyridan D. Vrontos, Ioannis D. Vrontos, Daniel Giomouridies.

Since the early 1990s, hedge funds have become an increasingly popular asset class. The amount invested globally in hedge funds rose from approximately $50 billion in 1990 to approximately $1 trillion by the end of 2004. And because these funds characteristically use stantial leverage, they play a far more important role in the global securities markets than the size of their net assets indicates. Moreover, investments in hedge funds have become an important part of the asset mix of institutions and ever wealthy individual investors (Malkiel, B. and Saha, A. (2005).

4The number of FOHFs increase by 40% between 2001 and 2003, and now comprised almost two third of the $650 billion invested in the USA’s hedge fund market. Due to its nature it is difficult to estimate the current size of hedge fund industry. 5Van Hedge Fund Advisors estimates that by the end of 1998 there were 5380 hedge fund managing $311 in capital, with between $800 billion and $1 trillion in total assets, which indicates the higher number of recent new entries. So far, hedge fund is based on American phenomena. About 90% hedge fund managers are based in the US, 9% in Europe and 1% in Asia and elsewhere. Now a day’s around 5883 hedge funds are trading around the world. (*Barclay Hedge database).

Chart 1: Assets of Hedge fund industry from 1997 to 2009.

Source: 

According to the Barclay hedge database the asset of hedge fund industry is $1205.6 billion dollar.

4 Financial times, 29th October, 2003.

1.2-Research questions:——研究問題

Specifically in this paper, I want to address two main questions. First one is what is the performance of hedge fund and FTSE100 over the period of 2001 to 2008? To evaluate the performance I use three traditional risk adjusted performance measurement model. To give a better idea and matter of easily understand I use the Sharp ratio, the Treynor ratio, and the Capital Asset Pricing Model (CAPM). However, the equity market index is not necessarily the right benchmark for hedge funds, therefore, market betas and abnormal returns may not be the appropriate measures for risks and profits. To mitigate this problem, I calculate sharp ratios, which are defined as the ratio of the average excess fund returns over the standard deviation.#p#分頁標(biāo)題#e#

Second question is does hedge funds gives better return from UK equity market (FTSE100)? To make this comparison I use regression analysis where the correlation will show how the hedge funds act against the FTSE 100.

1.3-Objective of the study:——這項(xiàng)研究的目的

The main objective of this study is to find out the performance of Hedge fund relatively with the UK equity market FTSE 100. In addition, I address in this paper four major hedge funds performance correlation with FTSE100. As a result an individual investor can easily understand which portfolio will give better return at their investment perspective. This study focuses on UK investor’s perspective only.

In the past several years, lots of studies had been done on this area like Park and Staum (1998), Brown et al. (1999), Agarwal and Naik (2000), Herzberg and Mozes (2003), Capocci and Hubner (2004), and Malkiel and Saha (2005) analysis the hedge fund performance. Most of the statistical methodology is on the regression with equity markets and rest of all are in the cross product ratio. Above all they tried to find out the return of different types of hedge fund depending on the market risk and market return.

So finally, the purpose of this paper is clearly established, that is to understand hedge fund performance over the UK equity market (FTSE100).

1.5-Overview of the methodology:——概述的方法

In this section I would like to describe an overview of my methodology. To find out the hedge fund performance and the FTSE100 market’s performance I use three traditional risk-adjusted performance measurement models. First one is the Sharpe ratio, secondly, the Treynor ratio and finally, the Capital Asset Pricing Model (CAPM). I address the Sharpe ratio and the Treynor ratio because these two gives better easy view for an investor to evaluate the hedge fund performance by themselves. However, the Sharpe ratio and the Treyneo ratio measure the excess return of per unit of risk for an investment asset. These two are used to understand how well the return of an asset compensates the investor for the risk taken. When comparing two assets each with the expected return of fund against the same benchmark with risk free return, the asset with the higher Sharpe ratio gives more return for the same risk. As a result investor can easily understand where to invest.

In this paper I use total 287 funds including different types of hedge funds like- Event driven (31), Hedge fund (54), Global macro (37) and Market neutral (165). As a benchmark I use FTSE100 and for the risk free rate I use UK 10 year Treasury bond. All data were collected from the DataStream which is run by Thomson Reuters the world’s leading source of intelligent information for businesses and professionals .

1.6-Definition of the key terms:——關(guān)鍵術(shù)語的定義

Hedge fund:

In the early study by Francis C.C. Koh, Winston T.H. Koh , David K.C. Lee, Kok Fai Phoon (2004) stated in their report that “Hedge Funds are innovative investment structures that were first created more than 50 years ago by Alfred Winslow Jones. He established a fund with the following features:

(a) He set up “hedges” by investing in securities that he determined as undervalued and funding these positions partly by taking short positions in overvalued securities, creating a “market neutral” position;

(b) He also designed an incentive fee compensation arrangement in which he was paid a percentage of the profits realized from his clients’ assets; and

(c) He invested his own investment capital in the fund, ensuring that his incentives and those of his investors were aligned and forming an investment “partnership”. Most modern hedge funds possess the above listed features, and are set up as limited partnerships with a lucrative incentive-fee structure. In most hedge funds, managers also often have a significant portion of their own capital invested in the partnerships. The term “hedge fund” has been generalized to describe investment strategies that range from the original “market-neutral” style of Jones to many other strategies and opportunistic situations, including global/macro investing.”

On the other report by Liang, B. (1999) stated on his report that there are two major types of hedge funds, one is inshore and another is offshore. Onshore funds are limited partnerships of no more than 500 investors. Offshore funds are limited liability corporations or partnerships established in the tax neutral jurisdictions that allow investors an opportunity to invest outside their own country and minimize their tax liabilities.

Due to the large variety of hedge fund investing strategies, there is no standard method to classify hedge funds smartly. There are at least 8 major databases set up by data vendors and fund advisors. I follow the classification used by Eichengreen and Mathieson (1998), which relied on the MAR/Hedge database. Under this classification, there are 8 categories of hedge funds with 7 differentiated styles and a fund-of-funds category. For my paper I chose three different categories, which are as follows:

(a) Event driven funds. These are funds that take positions on corporate events, such as taking an arbitraged position when companies are undergoing re-structuring or mergers. For example, hedge funds would purchase bank debt or high yield corporate bonds of companies undergoing re-organization (often referred to as 'distressed securities'). Another event-driven strategy is merger arbitrage. These funds seize the opportunity to invest just after a takeover has been announced. They purchase the shares of the target companies and short the shares of the acquiring companies.

(c) Global/Macro funds refer to funds that rely on macroeconomic analysis to take bets on major risk factors, such as currencies, interest rates, stock indices and commodities. Opportunistic trading manager that makes profits from changes in global economies typically based in major interest rate shifts. To make profits managers uses leverage and derivatives.#p#分頁標(biāo)題#e#

(d) Market neutral funds refer to funds that bet on relative price movements utilizing strategies such as long-short equity, stock index arbitrage, convertible bond arbitrage and fixed income arbitrage. Long-short equity funds use the strategy of Jones by taking long positions in selective stocks and going short on other stocks to limit their exposure to the stock market. Stock index arbitrage funds trade on the spread between index futures contracts and the underlying basket of equities. Convertible bond arbitrage funds typically capitalize on the embedded option in these bonds by purchasing them and shorting the equities. Fixed income arbitrage bet on the convergence of prices of bonds from the same issuer but with different maturities over time. This is the second largest grouping of hedge funds after the Global category.

Source Eichengreen and Mathieson (1998).

2.1.2-Current scenario of hedge funds:——當(dāng)前場景的對沖基金

Chapter two——第二部分

Literature review:——文獻(xiàn)綜述

2.1-History of hedge fund——對沖基金的歷史

Despite the increasing interest and recent development, few studies have been carried out on hedge funds comparing to other investment tools like mutual funds. “An analysis of Hedge Fund performance 1984-2000” by Capocci Daniel using one of the greatest hedge fund database ever used on his working paper (2796 individual funds including 801 dissolved), to investigate hedge funds performance using various asset-pricing models, including an extension from of Carhart’s (1997) model combined with Fama and French (1998), Agarwal and Naik (2000) models that take into account the fact that some hedge funds invest in emerging market bond. At the end they found that their model does a better job describing hedge funds behaviour. That appears particularly good for the Event Driven, Global Macro, US Opportunistic, Equity non-Hedge and Sector funds.

Since the early 1990s, when around 2000 hedge funds were managing assets totalling capital of $60 billion, the subsequent growth in the number and asset base of hedge funds has never really been refuted. The industry only suffered from a relative slowdown in 1998, but since then has enjoyed a renewed vitality with an estimated total of 10,000funds managing more than a trillion US dollars by the end of 2006. The growing trend of the sector remained remarkably sustained during the stock market collapse that started in March 2000, when the NASDAQ composite Index reached an all-time high of 5,132 and finished three years later with a floor level of 1,253. In the meantime, the global met asset value (NAV) of hedge funds continued to grow at a steady rate of 10.6% (Van Hedge Funds Advisors International, 2002), contrasting with a decrease of 2.7% in the worldwide mutual fund industry ( Investment Company Institute, 2003). In 2001, Capocci and Hubner(2004) estimated that there were 6,000 hedge fund managing around $400 billion. In 2007, Capocci, Duquenne and Hubner (2007) estimated that there were 10,000 hedge funds managing around $1 trillion. This is a growth of 11% in the number of funds and 26% in assets over six years (6PhD thesis paper by Daniel P.J. Capocci).#p#分頁標(biāo)題#e#

Other studies from practitioners Hennessee (1994), and Oberuc (1994) also showed an evidence of superior performance in the case of hedge funds. Ackernann and Al. (1999) and Liang (1999) who compared the performance of hedge funds to mutual funds and several indices, found that hedge funds constantly obtained better performance than mutual funds. Their performance was not better than the performance of the market indices considered. They also indicated that the returns in hedge funds were more unstable than both the returns of mutual funds and those of market indices. According to Brown and Al. (1997) hedge funds showing good performance in the first part of the year reduce the volatility of their portfolio in the second half of the year (Capocci Daniel- An analysis of hedge fund performance 1984-2000). Taking all these results into account hedge funds seems a good investment tool.

6 PhD thesis paper by Daniel P.J. Capocci. Electronic copy available at: http//ssrn.com/abstract=1008319.

2.1.1-Facts and finding of development in hedge funds:——事實(shí)和發(fā)現(xiàn)對沖基金的發(fā)展

As a result of flexible investment strategies, a better manager inventive alignment, sophisticated investors, and limited SEC regulations hedge funds have gained incredible popularity. In the report of Agarwal, V. and Naik, N. (2004) stated that “it is well accepted that the world of financial securities is a multifactor world consisting of different risk factors, each associated with its own factor risk premium, and that no single investment strategy can span the entire "risk factor space." Therefore investors wishing to earn risk premia associated with different risk factors need to employ different kinds of investment strategies. Sophisticated investors, like endowments and pension funds, seem to have recognized this fact as their portfolios consist of mutual funds as well as hedge funds.1 Mutual funds typically employ a long-only buy-and-hold-type strategy on standard asset classes, and help capture risk premia associated with equity risk, interest rate risk, default risk, etc. However, they are not very helpful in capturing risk premia associated with dynamic trading strategies or spread-based strategies. This is where hedge funds come into the picture. Unlike mutual funds, hedge funds are not evaluated against a passive benchmark and therefore can follow more dynamic trading strategies. Moreover, they can take long as well as short positions in securities, and therefore can bet on capitalization spreads or value-growth spreads. As a result, hedge funds can offer exposure to risk factors that traditional long-only strategies cannot”.

However, investor can create exposure like hedge funds by trading on their own account, in practice they encounter many frictions due to incompleteness of markets like the publicly traded derivatives market and the financing market. Moreover, the derivatives market for standardized contracts has grown a great deal in recent years, still it is very costly for an investor to create a customized payoff on individual securities. The same is true for the financing market as well, where investors encounter difficulties shorting securities and obtaining leverage. These frictions make it difficult for investors to create hedge fund-like payoffs by trading on their own accounts.#p#分頁標(biāo)題#e#

According to Koh, F., Koh,W,. Lee, D,. and Phoon, K. (2004) “in 1990, the entire hedge fund industry was estimated at about US$20 billion. At of 2004, there are close to 7000 hedge funds worldwide, managing more than US$830 billion. Additionally, about US$200-300 billion is estimated to be in privately managed accounts. While high net worth individuals remain the main source of capital, hedge funds are becoming more popular among institutional and retail investors. Funds of hedge funds and other hedge fund-linked products are increasingly being marketed to the retail market. While hedge funds are well established in the United States and Europe, they have only begun to grow aggressively in Asia. According to Asia Hedge magazine, there are more than 300 hedge funds operating in Asia (including those in Japan and Australia), of which 30 were established in year 2000 and 20 in 2001. In 2003, 90 new hedge funds were started in Asia, compared with 66 in 2002, according to an estimate by the Bank of Bermuda. In 2004 more than US$15 billion, hedge fund investments in Asia are expected to grow rapidly. Several factors support this view. Asian hedge funds currently account for a tiny slice of the global hedge fund pie and a mere trickle of the total financial wealth of high net worth individuals in Asia”.

Hedge funds have posted attractive returns. From 1987 to 2001, the Hennessee Hedge Fund Index posted annualised returns of 18%, higher than the S&P’s 13.5%. Hedge funds are seen as a natural “hedge” for controlling downside risk because they employ exotic investment strategies believed to generate returns that are uncorrelated to traditional asset classes. Hedge funds vary in their strategies. So-called macro funds, such as Quantum Fund, generally take a directional view by betting on a particular bond market, say, or a currency movement. Other funds specialize in corporate events, such as mergers or bankruptcies, or simply look for pricing anomalies the stock markets. Hedge funds vary widely in both their investment strategies and the amount of financial leverage. (Koh, F., Koh,W,. Lee, D,. and Phoon, K. (2004)

There are a number of factors behind the meteoric rise in demand for hedge funds. The unprecedented bull-run in the US equity markets during the 1990s expanded investment portfolios. This led an increased awareness on the need for diversification. The bursting of the technology and Internet bubbles, the string of corporate scandals that hit corporate America and the uncertainties in the US economy have led to a general decline in stock markets worldwide. This in turn provided fresh impetus for hedge funds as investors searched for absolute returns. (Koh, F., Koh,W,. Lee, D,. and Phoon, K. (2004)

Unlike registered investment companies, hedge funds are not required to publicly disclose performance and holdings information that might be construed as solicitation materials. Since the early 1990s, there has been a growing interest in the use of hedge funds amongst both institutional and high net worth individuals. Due to their private nature, it is difficult to obtain adequate information about the operations of individual hedge funds and reliable summary statistics about the industry as a whole. (Koh, F., Koh,W,. Lee, D,. and Phoon, K. (2004)#p#分頁標(biāo)題#e#

Hedge funds are known to be growing in size and diversity. As at the end of 1997, the MAR/Hedge database recorded more than 700 hedge fund managing assets of US$90 billion. This is only a partial picture of the industry, as many funds are not listed with MAR/Hedge. In practical terms, it is not easy to estimate the current size of the hedge fund industry unless all funds are regulated or obligated to register their operations with a common authority. Brooks and Kat (2001) estimated that, as at April 2001, there are around 6000 hedge funds with an estimated US $400 billion in capital under management and US $1 trillion in total assets. (Koh, F., Koh,W,. Lee, D,. and Phoon, K. (2004)

According to Koh, F., Koh,W,. Lee, D,. and Phoon, K. (2004) “three interesting features differentiate hedge funds from other forms of managed funds. Most hedge funds are small and organized around a few experienced investment professionals. In fact, more than half of U.S Hedge Funds manage amounts of less than US$25 million. Further, most hedge funds are leveraged. It is estimated that 70 per cent of hedge funds use leverage and about 18% borrowed more than one dollar for every dollar of capital. (See Eichengreen and Mathieson (1998). Another peculiar feature is the short life span of hedge funds. Hedge funds have an average life span of about 3.5 years (See Stefano Lavinio (2000) pp 128). Very few have a track record of more than 10 years. These features lead many to view hedge funds, as “risky” and “opportunistic”.

In the early study by Fung and Hsieh (2001), they use option like payoffs to view the risks of trend following hedge funds. They saw that the trend followers are typically commodity trading advisors (CTAs) who attempt to profit from trends in commodity prices using technical indicators. According to Fung and Hsieh (2001) trend followers are particularly interesting in that not only are their returns uncorrelated with the standard equity, bond, currency, and commodity indices, but their returns tend to exhibit option like features. They tend to be large and positive during the best and worst performing months of world equity indices. They cite evidence by Fung and Hsieh (1997) who show that if one divided up the states of the world into five states based on the return on the MSCI equity world index, trend followers tend to outperform when the MSCI equity return is at its lowest and highest. The relationship between trend followers and the equity market is non-linear and U-shaped. Although returns of trend following funds have a low beta against equities on average, the state-dependent betas tend to be positive in up-markets and negative in down markets.

As a result, Fung and Hsieh (2001) assume that the simplest trend following strategy has the same payout as a structured option known as the “look back straddle.” The owner of a look back call option has the right to buy the underlying asset at the lowest price over the life of the option. Similarly, a look back put option allows the owner to sell at the highest price. The combination of these two options is the look back straddle, which delivers the ex-post maximum payout of any trend following strategy. Fung and Hsieh (2001) then demonstrate empirically that look back straddle returns resemble the returns of trend following hedge funds.#p#分頁標(biāo)題#e#

Building on this pioneer work, Fung and Hsieh (2004) propose seven factors that explain aggregate hedge fund returns. These seven factors include the excess return on the S&P 500 index, the Wilshire small cap minus large cap index return, the term spread, the credit spread, and trend following factors for bonds, currencies, and commodities. They show that their seven factor model well explains variation in aggregate hedge fund returns. In addition, they find that equity long/short hedge funds tend to load positively on the S&P 500 index factor and the small cap minus large cap factor. These results are consistent with the observation that equity long/short hedge funds typically have a small positive exposure to stocks and tend to be long small stocks and short large stocks. Fung and Hsieh (2004) also find that fixed income funds on the other hand tend to load negatively on the change in the credit spread, where the credit spread is measured as the difference between the yield on Moody’s Baa bonds and the yield on the 10-year constant maturity Treasury bond. The reason is that fixed income funds typically buy bonds with lower credit ratings and/or less liquidity and then hedge the interest rate risk by shorting US Treasury bonds, which have the highest credit rating and are more liquid.

However, Agarwal and Naik (2004) also propose a multi-factor model to explain hedge fund risks. They find that non-linear option like payoffs are not restricted to trend followers and risk arbitrageurs, but are an integral feature of payoffs for a wide range of hedge fund strategies. In particular they observe that the payoffs on a large number of hedge fund strategies look like those from writing a put option on the equity index. These strategies include risk arbitrage, distressed debt, convertible arbitrage, and relative value arbitrage. Consistent with the exposure of these strategies to the risks borne by sellers of equity index put options, Agarwal and Naik (2004) find that these hedge funds suffer from significant left tail risk which tends to coincide with severe market downturns.

The performance of hedge fund in 2008 was very shocking like more than ten years ago. Teo, M (2009) stated that in the month of August 1998 alone LTCM lost 45% of its capital in the wake of the massive liquidity event triggered by the Russian rubble default. Lots of academic literature has shown that the year 2007 and 2008 was the worst performance of hedge fund. As we know that hedge fund managers make portfolio by taking position in equity market and another fund, but unfortunately the world equity market goes downside. As a result investors who wish to weather future financial maelstroms should take note of the non-linear relationship between hedge fund returns and the equity market.

2.3-Limitations (previous)——限制(前)

With respect to lightly regulated investment vehicles with great treading flexibility, hedge funds often pursue highly sophisticated investment strategies. Hedge funds promise absolute returns to their investor leading to a belief that they hold factor-neutral portfolios. With this in mind, hedge funds have some limitations. In the early studies many researchers discussed and explain that obstacles.#p#分頁標(biāo)題#e#

First of all if we consider the measurement model of hedge funds performance, most of the researcher use traditional performance measure model like, Sharpe ratio, Treynor ratio and Jensen alpha which are not adequate for the performance evaluation of hedge funds. Fung and Hsieh (2000) and Roy (2003) stated that is incorrect to use these performance measures t evaluate the hedge funds strategies. Brooks and Kat (2002), Kat (2003), Mahdavi (2004) and Murguia and Umemoto (2004) also mentioned that the Sharpe ratio does not represent the true performance of hedge funds because it does not take into consideration the asymmetry returns of these funds. As a result Perello (2007) propose to use the downside risk framework like Sortino ratio, the upside potential ratio and Omega measure as alternative performance measure. Moreover, Chung, Rosenberg and Tomeo (2004) and Scherer (2004) showed that Sortino ratio makes it possible to the investors to evaluate the risk and the performance of the hedge funds more sustainably than Sharpe ratio.

Secondly, according to Ackermann et al. (1999) and to Fung and Hsieh (2000), two upward biases exist in the case of hedge funds. They do not exist in the case of mutual funds, and they both have an opposite impact to the survivorship bias. Survivorship bias is an important issue in hedge funds performance studies (see Carhart and al. 2000). This bias is present when a database contains only funds that have data for the whole period studies. In this case, there is a risk of overestimating the mean performance because the funds that would have ceased to exist because of their bad performance would not be taken into account. The two upward biases exist because, since hedge funds are not allowed to advertise, they consider inclusion in a database primarily as a marketing tool. The first phenomenon stressed by Ackermann and al. (1999) and called the self-selection bias is present because funds that realize good performance have less incentive to report their performance to data providers in order to attract new investors. Malkiel, B. and Saha, A. (2005) stated in their report that “Databases available at any point in time tend to reflect the returns earned by currently existing hedge funds but they do not include the returns from hedge funds that existed at some time in the past but are presently not in existence (i.e., the truly "dead" funds) or exist but no longer report their results (the defunct funds). Unsuccessful hedge funds have difficulties obtaining new assets. Hence, they tend to close, leaving only the more successful funds in the database. But some funds stop reporting not because they are unsuccessful but because they do not want to attract new investment”.

The second point called instant history bias or backfilled bias (Fung and Hsieh 2000) occurs because after inclusion a fund’s performance history is backfilled. This may cause an upward bias because funds with less satisfactory performance history are less likely to apply for inclusion than funds with good performance history (Capocci Daniel 2001, An analysis of hedge fund performance 1984- 2000).