February 13, 2005 08:14 AM
Is There Hype Behind Hedge Funds?
Excerpt: Hedge fund indexes strongly overstate the industry's investment success and far too much money is being drawn into the funds as a result, with possibly dire consequences in the future, a leading U.S. academic said.
Hedge fund indexes strongly overstate the industry's investment success and far too much money is being drawn into the funds as a result, with possibly dire consequences in the future, a leading U.S. academic said.
"Between 1998 and 2004 there has been enormous growth in hedge fund assets to about $1 trillion and since they are typically leveraged their buying power is much greater," said Burton Malkiel, professor of economics at Princeton University. "Hedge funds often account for the lion's share of trading on the New York Stock Exchange."
He was presenting new hedge fund industry research at the Institutional Fund Management 2005 conference in Geneva this week organized by ICBI.
"Do I have a degree of skepticism about hyped returns? Am I worried too much money is chasing future returns? Yes. Let the buyer beware," Malkiel said.
On the face of it, hedge funds appear to have offered exceptional performance as stock markets boomed in the 1990s, then bust in the 2000-2002 post-dotcom bear period, before flattening out and offering single digit investment returns.
Between 1988 and 2003, the Van Global Hedge Fund Index showed compound returns of 15.9 percent, compared with 5.9 percent for the MSCI world equities index and 2.3 percent for the S&P 500 stock index.
Much of the hedge funds' success was attributed to their ability to sell equities short, and so preserve capital during the downturn in stock markets, while traditional long-only funds hemorrhaged losses.
But Malkiel said the freewheeling nature of the hedge fund business, with their freedom to choose whether to report performance results and which numbers to publish, compared with the obligatory quarterly reporting of U.S. mutual funds, injected a strong positive bias into industry databases.
Backfill bias
A major problem is "backfilling," where a hedge fund manager might, for example, submit numbers for two months of strong performance to a database and omit the first month of mediocre returns.
Malkiel analyzed hedge fund returns for backfill bias between 1994 and 2003 and found that with backfill these averaged 14.29 percent, but without backfill 8.45 percent - a 584 basis points difference in performance.
Another problem with hedge fund data is "survivorship bias" as they have a much lower survival rate before being closed down than mutual funds, meaning indexes tend to reflect the results of successful funds rather than poor-performing dead funds.
Of 604 funds in the TASS hedge fund database in 1996, some 480 had "died" by 2003.
READ FULL STORY ...In Search of a Sure Thing - Feb 25, 2005
Invest Your IRA in Real Estate? - Feb 25, 2005
Four Top Performing Newsletters - Feb 25, 2005
Women Less Tolerant of Risk: Poll - Feb 25, 2005
Fannie Mae Scrambles for New Ways to Raise Capital - Feb 24, 2005
Toshiba Names New President With a Record of Turnarounds - Feb 23, 2005
Questions Arise of Possible Bias at Drug Maker - Feb 23, 2005
Winn-Dixie Files for Bankruptcy Protection - Feb 23, 2005
Novartis to Become No. 1 Generic Drug Maker With $8.4 Billion Deal - Feb 23, 2005
When Greenspan Is Stumped, Investors Should Play It Safe - Feb 21, 2005
Four Strong Emerging Markets. But How to Play Them? - Feb 21, 2005
American Express's Advisory Unit Faces Fraud Charges - Feb 19, 2005
Time Warner Stops Granting Stock Options to Most of Staff - Feb 19, 2005
Exxon Mobil Takes Top Spot From G.E. - Feb 19, 2005
A New S.E.C. Rule Fails to Raise Share Prices, and Some Are Angry - Feb 19, 2005
Fed Chief Urges Cutback in Scale of 2 Big Lenders - Feb 18, 2005
Outlooks Differ at Wal-Mart and Target - Feb 18, 2005
The Times Company Acquires About.com for $410 Million - Feb 18, 2005
Merck May Resume Sales of Painkiller, Official Says - Feb 18, 2005
NASD Says Fund Family Paid Improper Fees - Feb 18, 2005
Starbucks Will Venture Into Coffee Liqueur - Feb 18, 2005
A Hedge Fund May Try to Buy Circuit City, but It May Not - Feb 18, 2005
Investors Get Shortchanged on Interest - Feb 17, 2005
E-Trade Slashes Fees Across The Board, Continuing Online Brokerage Price War - Feb 16, 2005
E*Trade Cuts Some Trading Costs - Feb 16, 2005
G.M. Will Pay $2 Billion to Sever Ties to Fiat - Feb 15, 2005
Sullivan: Accounting Sank Merger Deal - Feb 13, 2005
Bleak Outlook Dulls Sharper Image - Feb 13, 2005
Citigroup To Cut Up To 1,000 Jobs? - Feb 13, 2005
Fidelity's Outsourcing Biz Hits Record - Feb 13, 2005
Carly May Get $42 Million - Feb 13, 2005
Analyzing the I.Q. of Money - Feb 13, 2005
Marketing of Vioxx: How Merck Played Game of Catch-Up - Feb 13, 2005
Too Big: Learning From Mistakes - Feb 10, 2005
Valuing MCI in an Industry Awash in Questions - Feb 10, 2005
S.E.C. Chief, Under Cross-Pressure, Sees Some Modest Changes - Feb 10, 2005
Fiorina's Confrontational Tenure at Hewlett Comes to a Close - Feb 10, 2005
What Hewlett-Packard Seeks In a Successor to Fiorina - Feb 10, 2005
Taken For A Ride - Feb 07, 2005
Busting The Bond Myth - Feb 07, 2005
If Profits Grow, How Can the Market Sink? - Feb 06, 2005
Is Online Retailing a Victim of Its Own Success? - Feb 06, 2005
Court Blocks U.S. From Seeking Billions From Tobacco Industry - Feb 06, 2005
Fidelity Cuts Commissions On Some Internet Trades - Feb 04, 2005
Schwab to Reduce Commissions By 35% for Some Online Trades - Feb 04, 2005
For MCI, Qwest May Not Be Most Desirable - Feb 04, 2005
A Merger in Search of a Home. Yours. - Jan 31, 2005
Another Clock Is Ticking at Delta Air Lines - Jan 31, 2005
Windows, Boxes and a Halo Bolster Microsoft Profit - Jan 31, 2005
U.S. Property Prices Too High? Some Funds Look Abroad - Jan 31, 2005
Marsh to Pay $850 Million to Settle Charges by Spitzer - Jan 31, 2005
SBC Finishes $16 Billion Deal for AT&T - Jan 31, 2005
The Higher Price of Staying Public - Jan 25, 2005
AT&T Looks Beyond 'Number, Please' - Jan 25, 2005
Best of All Possible Worlds? Bond Buyers Crave Yield but Show No Fear - Jan 25, 2005
Citigroup Posts 12% Profit Rise and Sees Slowing Growth - Jan 25, 2005
Buy.com Plans $86.3 Million IPO - Jan 25, 2005
Have We Seen eBay's Highest Bid? - Jan 25, 2005
Despite Pact Over Research, Goal Is Elusive - Jan 17, 2005
Ameritrade Offers $5 Stock Trade As Brokers' Price War Heats Up - Jan 15, 2005
Schwab Reduces Assets Required For Avoiding Fees - Jan 15, 2005
With Takeover Completed, Oracle Sends Layoff Notices - Jan 15, 2005
Investors Flock to Loans Made to Companies Deep in Debt - Jan 15, 2005
Foreign-Profit Tax Break Is Outlined - Jan 15, 2005
On Subsidies, the Sky Wasn't the Limit - Jan 15, 2005
No Happy New Year for a Cable Channel Cut by DirecTV - Jan 15, 2005
Five Trading Rules To Live By In 2005 - Jan 15, 2005
Rate Expectations - Jan 15, 2005
Hollywood Agrees To Movie Gallery Bid - Jan 14, 2005
Comcast Plans Major Rollout Of Phone Service Over Cable - Jan 10, 2005
Morningstar Bets On Bidders For IPO - Jan 09, 2005
Supreme Court Will Review Conviction of Arthur Andersen - Jan 08, 2005
Marsh Executive Admits Guilt in Bid Case - Jan 07, 2005
Judge Rejects United Airlines Deal With Pilots - Jan 07, 2005
10 Ex-Directors From WorldCom to Pay Millions - Jan 07, 2005
Alltel Is Said to Be Suitor for Carrier in Northwest - Jan 07, 2005
Krispy Kreme to Reduce 2004 Reported Profit - Jan 07, 2005
Market Owner Agrees to Buy Pacific Exchange - Jan 07, 2005
Cash Flow in '04 Found Its Way Into Dividends - Jan 07, 2005
Citigroup Reverses Shift of Executives in China - Jan 07, 2005
Chief Executive Was Paid Millions, and He Never Noticed the Fraud? - Jan 07, 2005
Continental Hit by Fare Wars, Seat Glut - Jan 05, 2005
Google Sticker Shock - Jan 04, 2005
Inflation Jitters Sink Bonds - Jan 04, 2005
Krispy Kreme To Restate Results - Jan 04, 2005
Investors Continue to Pile Into Hedge Funds - Jan 04, 2005
Some Older Investors May Find Roth IRAs More Attractive - Jan 04, 2005
Ultrashort Bond Funds Offer Option for Interest-Rate Blues - Jan 04, 2005
Citigroup Names New China CEO - Jan 04, 2005
Reacting To A Dollar With No Muscle - Jan 03, 2005
Last Year's Worries Wane - Jan 03, 2005
Globally, Stocks Are Poised To Advance Further - Jan 03, 2005
From Simple To Complex, Hedge Funds Gain Ground - Jan 03, 2005
Wall Street's Designs on '05? A Merger Boom - Jan 03, 2005
The Envelopes, Please - Jan 03, 2005
Fund Industry Outlook For 2005 - Jan 01, 2005
Late Stock Market Rally Makes 2004 a Winning Year - Jan 01, 2005
F.D.A. Approves Pfizer Remedy for Nerve Pain From Diabetes - Jan 01, 2005
Doctors, Too, Ask: Is This Drug Right? - Jan 01, 2005
• Structured Settlements
www.setcap.com - cash for structured settlements, sell annuity, lottery winnings, and more.
• Personal Finance: Finance News Today provides money saving tips, news, and articles on personal finance issues like insurance, real estate, college planning and much more.
• Compare all our 0% Credit Card UK against our 0% balance transfers and cash back deals.
• Browse through our Credit Cards deals and apply online.
• financial tip - financial tips article and more.
• Arizona llc - incorporate a arizona llc. they offer solutions for limited liability company asset protection in arizona and california. incorporation services are provided online with 24 hour filings and expedited approvals. www.paralegal-plus.com for cpa lawyers.
• Credit Repair
repairmycreditnow.com/Credit_Repair_Advice.htm - repair my credit now credit services offers credit repair, restoration and education through our exclusive "v" phase process ™.
• Citibank Home Equity Lines of Credit: Rates as low as Prime - 0.50% variable APR for Life, currently 5.50% variable APR.
• Day Trading - day trading signals for active stock and options traders.
• Ken Langone - ken langone: make my day
• Credit Repair - repair my credit now credit services offers credit repair, restoration and education through our exclusive "v" phase process ™
• Online Option Trading - oexoptions is an oex online stock option trading company offering a free 15-day trial for all new customers.
• fix bad credit
Want to See Your Ads Here? Claim Your Ad Space at Personal Finance Weblog by Writing to Webmaster. Starting at $25/month, see your text ads in more than 2,000 indexed pages at PFBlog, the Best Personal Finance Blog, or MM Money, MM's Daily Personal Finance Readings. Full Rate Card Available Here.
