Archive for February, 2010

Self Selection Bias in Hedge Fund Databases

Hedge funds can choose to report their results to database providers who report the overall performance of hedge funds in various categories.

Since performance disclosure is voluntary, peer performance is not a reliable measure. Poor performing managers are not likely to disclose performance (biasing performance upward) and large established managers may not want the trouble (or may want to make their performance stand out rather than be averaged into the peer group.) The aggregate effect is probably that database returns are overstated.

Posted on 22nd February 2010
Under: Uncategorized | No Comments »

Why do Hedge Funds Lack Transparency

Hedge funds are sometimes criticized as lacking transparency. There are a number of reasons for this.

For one thing, they are privately organized entities with minimal regulatory oversight. They are not required to disclose their holdings and strategies, so they do not.

Closely related to the lack of regulation is the fact that they are only marketed to qualified investors – those who presumably have both the sophistication to understand the strategies and the capacity to accept losses. These qualified investors may be able to glean information about the fund, but public investors, who are not able to invest in the fund anyway, are not.

Perhaps the most significant reason, however, is competitive secrecy. Hedge funds are competing both for investment funds and for investment opportunities. They often employ sophisticated techniques that could be compromised if they were widely known.

Posted on 12th February 2010
Under: Uncategorized | No Comments »

What is the Difference Between a Hedge Fund and a Mutual Fund?

Hedge funds are not subject to investment restrictions and thus have greater breadth of investment instruments at their disposal. These typically include leverage, short sales, derivatives, and concentrated or illiquid positions.

Posted on 3rd February 2010
Under: Uncategorized | No Comments »