Should you rely on that hedge fund index?
Keeping in similar vein to a number of the previous entries about the mysteries of defining, selecting and tracking hedge fund strategies here is a 2015 paper by Swiss wealth manager Pictet titled “Hedge fund indices: how representative are they?”
Amongst its gems covering the biases of the indices is this great graphic explaining the source of ‘self-selection’ bias:
Core message: less than one percent of funds report to all the tracking databases. One study puts the impact on the performance figures of this at 1.9% per annum. More worryingly, the cumulative impact of all biases may be as high as 10.7% annually.
Over time that adds up to a lot of dispersion between index providers…
