Survivorship bias hedge fund
Hedge fund survivorship bias? Some claim "aggregate" hedge fund returns are overstated. Why care about "average" hedge funds? I have no interest in the performance of every product pretending to be a hedge fund. Skill is rare therefore "typical" returns will be less than cash over the long term. Not remotely concerned by returns of "all" hedge funds any more than I care about the performance of "all" stocks. Ignore benchmarks and focus on absolute returns NOT relative returns.
The "average" runner can't break 4 hours for the marathon. So no-one can run fast? Those guys doing over 26 miles in just over 2 hours must be lucky or frauds? You, yourself, can't beat the market therefore no-one can? Dumb logic that "Nobel" prize winners believe. Since averages are apparently so important to some people perhaps the Guinness Book of World Records should report AVERAGE performance not the elite. Personally I'll stick with the brilliant BEST not the clueless crowd of managers that dominate hedge fund indices.
Golf headlines? "Golf scores overstated", "Golfers can't break 100". Just because these facts are true for the ENTIRE set of people who have ever swung a putter, does not preclude the existence of individuals who through hard work and skill regularly break 70. Sports data focuses on professionals and it is time hedge fund data focused on the few pros and excluded the many amateurs. There is a wide ability range within the hedge fund industry. The AVERAGE fund will not be a good performer just like the AVERAGE golfer. The "aggregate" is not meaningful when dispersion is so enormous.
Constructing a comprehensive hedge fund performance database is difficult. Many of the best hedge funds don't need to report. Hedge fund indices have widely differing reporting funds and some "benchmark" construction firms mistakenly include many beta repackagers pretending to be hedge funds. Alpha capture is the extraction of abnormal returns from the unskilled by the skilled. The average hedge fund is unskilled.
Many hedge funds close down or shut to new and existing investors because of SUCCESS. The manager has made enough from outstanding performance to retire and do something more interesting. The statistical studies are flawed because they miss POSITIVE survivor bias but the naysayers assume only negative factors behind a hedge fund ceasing to exist. A hedge fund should be evaluated on its own merits; how "all" hedge funds do is irrelevant.
Conclusions regarding "every" hedge fund are a waste of time. The barriers to entry are low. Anyone can get a Bloomberg, set up a Limited Partnership and call themselves a hedge fund. Every prop trader has prime brokers and 3pms telling them how wonderful they are and to go out on their own. Most of the wannabes drag down aggregate performance and negatively affect total industry returns. Active investing is a zero-sum game so the performance of a TYPICAL hedge fund will tend towards CASH minus EXECUTION COSTS minus FEES ie low single digits over the long term. However truly skilled hedge funds will perform much better on a risk-adjusted basis than ANY OTHER INVESTMENT PRODUCT.
Interesting how these "overstated" hedge fund return "experts" never mention the bias inherent in their beloved "passive" equity funds. Index trackers have survivorship bias but are often compared favorably to hedge funds. The original stock index, the Dow, began with 12 stocks but 11 of them disappeared over time. In the 1990s Bethlehem Steel and Woolworths were Dow Industrials stalwarts; where are they now? In 2000 the Nasdaq had about 5,500 stocks and today just 3,500 or so; many of the missing went to zero but the Nasdaq index calculation ignores all those failed stocks. Why? The Nasdaq index would be much lower is the divisor included all those failures.
Over the decades, for every survivor like General Electric GE, Coca Cola KO and Microsoft MSFT there have been hundreds of stocks that went to zero. More recently, for every Google GOOG there were numerous Pets.com's. Some equities get bought out at a premium but far more vanish through bankruptcy. The likeliest future price for a stock in the long term is ZERO. Countless public and private companies have lost 100% of their investors' capital. Remember that the next time someone tells you to hold a stock for the "long haul". The odds are very much against you.
The "average" runner can't break 4 hours for the marathon. So no-one can run fast? Those guys doing over 26 miles in just over 2 hours must be lucky or frauds? You, yourself, can't beat the market therefore no-one can? Dumb logic that "Nobel" prize winners believe. Since averages are apparently so important to some people perhaps the Guinness Book of World Records should report AVERAGE performance not the elite. Personally I'll stick with the brilliant BEST not the clueless crowd of managers that dominate hedge fund indices.
Golf headlines? "Golf scores overstated", "Golfers can't break 100". Just because these facts are true for the ENTIRE set of people who have ever swung a putter, does not preclude the existence of individuals who through hard work and skill regularly break 70. Sports data focuses on professionals and it is time hedge fund data focused on the few pros and excluded the many amateurs. There is a wide ability range within the hedge fund industry. The AVERAGE fund will not be a good performer just like the AVERAGE golfer. The "aggregate" is not meaningful when dispersion is so enormous.
Constructing a comprehensive hedge fund performance database is difficult. Many of the best hedge funds don't need to report. Hedge fund indices have widely differing reporting funds and some "benchmark" construction firms mistakenly include many beta repackagers pretending to be hedge funds. Alpha capture is the extraction of abnormal returns from the unskilled by the skilled. The average hedge fund is unskilled.
Many hedge funds close down or shut to new and existing investors because of SUCCESS. The manager has made enough from outstanding performance to retire and do something more interesting. The statistical studies are flawed because they miss POSITIVE survivor bias but the naysayers assume only negative factors behind a hedge fund ceasing to exist. A hedge fund should be evaluated on its own merits; how "all" hedge funds do is irrelevant.
Conclusions regarding "every" hedge fund are a waste of time. The barriers to entry are low. Anyone can get a Bloomberg, set up a Limited Partnership and call themselves a hedge fund. Every prop trader has prime brokers and 3pms telling them how wonderful they are and to go out on their own. Most of the wannabes drag down aggregate performance and negatively affect total industry returns. Active investing is a zero-sum game so the performance of a TYPICAL hedge fund will tend towards CASH minus EXECUTION COSTS minus FEES ie low single digits over the long term. However truly skilled hedge funds will perform much better on a risk-adjusted basis than ANY OTHER INVESTMENT PRODUCT.
Interesting how these "overstated" hedge fund return "experts" never mention the bias inherent in their beloved "passive" equity funds. Index trackers have survivorship bias but are often compared favorably to hedge funds. The original stock index, the Dow, began with 12 stocks but 11 of them disappeared over time. In the 1990s Bethlehem Steel and Woolworths were Dow Industrials stalwarts; where are they now? In 2000 the Nasdaq had about 5,500 stocks and today just 3,500 or so; many of the missing went to zero but the Nasdaq index calculation ignores all those failed stocks. Why? The Nasdaq index would be much lower is the divisor included all those failures.
Over the decades, for every survivor like General Electric GE, Coca Cola KO and Microsoft MSFT there have been hundreds of stocks that went to zero. More recently, for every Google GOOG there were numerous Pets.com's. Some equities get bought out at a premium but far more vanish through bankruptcy. The likeliest future price for a stock in the long term is ZERO. Countless public and private companies have lost 100% of their investors' capital. Remember that the next time someone tells you to hold a stock for the "long haul". The odds are very much against you.
© posted by Hedge Fund on 6:05 PM
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