intra.som.umass.edu

422 views
389 views

Published on

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
422
On SlideShare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
0
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

intra.som.umass.edu

  1. 1. Forthcoming: Financial Analysts Journal Hedge Fund Performance: 1990-1999 Bing Liang Weatherhead School of Management Case Western Reserve University Cleveland, OH 44106 Phone: (216) 368-5003 Fax: (216) 368-4776 E-mail: BXL4@po.cwru.edu Current Version: February 2000
  2. 2. Abstract Using a large database, we study hedge fund performance and risk during a ten-year period from 1990 to 1999. The empirical results show that hedge funds have an annual return of 14.2% during this time period, comparing with 18.8% of the S&P 500 index. However, the S&P 500 index is much more volatile than hedge funds as a whole. We document an annual survivorship bias of 2.43% for hedge funds. We examine the year 1998 in detail since hedge funds are heavily affected by the global financial market tumble in that year. 1998 had the highest volatility for hedge fund returns. More funds died and fewer funds were born in 1998 than any other year. There are very few funds that change their fee structures. We find that fund fee changes are performance related: poor-performed funds drop incentive fees. 2
  3. 3. Hedge funds are one of the fastest growing sectors in finance. Recently, hedge funds make the headline news almost on a daily basis. In particular, after the 1997 Asian financial crisis and the 1998 near collapse of the Long-Term Capital Management LP, hedge funds have been catching the eye of investors, money managers, and regulators. However, the public has a very limited understanding of the hedge fund industry. The main reason is that the information on returns, risk, and fee structures of hedge funds are largely unavailable to the public since hedge funds are either non-regulated U.S. partnerships or offshore corporations that are not required to disclose their information. This unregulated feature on hedge funds gives fund managers huge flexibility to operate in a “black box”, which generates tremendous curiosity from the investment communities. In addition, a lot of attention has been focused on a few notable hedge funds, but little effort has been made to consider the industry as a whole. Currently, there are a few commercial data vendors/consultants that possess hedge fund data. Examples are Hedge Fund Research, Inc. (HFR), Managed Account Reports, Inc. (MAR), and TASS Management Limited (TASS).1 A few academic studies on hedge funds are usually based on these databases. For example, Fung and Hsieh (1997a) use combined data from Paradigm LDC and TASS. Ackermann, McEnally, and Ravenscraft (1999) utilize combined data from HFR and MAR. Liang (1999) also uses data from HFR. One exception is that Brown, Goetzmann, and Ibboston (1999) employ the hand- collected data from the U.S. Offshore Funds Directory. Liang (2000) indicates that there are differences and errors in some hedge fund databases. For the same funds tracked by HFR and TASS, returns, assets, fees, and 1
  4. 4. investment style classifications could be different. He suggests that the TASS database should be used for academic research because of its relative completeness and accuracy. In this paper, we use the TASS data containing over 2,000 hedge funds to study their performance and risk for a ten-year period from January 1990 to July 1999. We evaluate the industry by using more funds and over a longer time horizon than the previous studies. Our comprehensive data also allows us to examine how the current financial crises impact the hedge fund industry. Moreover, we examine not only live funds but also dead funds, therefore we can study the survivorship bias issue of hedge funds. In particular, we focus our attention on the year 1998 since that was a special year for the entire hedge fund industry. In 1998, Russian debt defaulted, the Long-Term Capital Management LP almost collapsed, and many other hedge funds suffered similar losses as the Long-Term Capital Management LP. Data We obtain data on fund returns, assets, fees, investment styles, and other fund characteristics from TASS. As of July 1999, the TASS database covered 2,016 hedge funds, including 1,407 live funds and 609 dead funds. The total asset under management is about $175 billion. Among the 2,016 funds, the majority report returns, net of various fees, on a monthly basis. After deleting the 95 funds with gross returns and quarterly returns, we have 1,921 funds left for our study. According to TASS, there are 15 investment styles. They are top down macro, bottom up, short selling, long bias, market neutral, opportunities, relative value, arbitrage, 2
  5. 5. discretionary, trend follower, technical, fundamental, systematic, diverse, and other. Note that these styles may be overlapping.2 Hedge Fund Performance: 1990-1991 Across Time and Investment Styles. We analyze hedge fund performance and risk by year and by investment styles. Table 1 shows hedge fund performance by investment styles from 1990 to 1999. Over the 10-year period, the average monthly return of all hedge funds in our sample is 1.11% per month, or 14.2% per year. Among them, 1993 is the best year with an annualized return of 27% and 1994 is the worst year with an annual return of –0.6%. However, the most volatile year for hedge funds is neither 1993 nor 1994, it is 1998 when many hedge funds run into trouble due to the Russian debt crisis, soon after the Asian financial crisis in 1997. The average standard deviation of returns across 15 styles in 1998 is 2.57%, much higher than the other years. Note that this ten-year period is roughly coincident with the longest bull market in the US stock market history. The average annualized return for the S&P 500 index is 18.8% during the same period. Across investment styles, we have winners and losers. The winners are opportunistic and long bias strategies, and the losers are systematic and technical strategies. Note that these styles are overlapping since a fund can employ both long bias and short selling strategies. 3
  6. 6. Hedge Funds versus S&P 500 Index. In Figure 1, we plot the cumulative monthly returns of hedge funds versus the cumulative monthly returns of the S&P 500 index from January 1990 to July 1999. As we can see, a $1 investment in all hedge funds in January 1990 can grow to $3.39 in July 1999. In contrast, a $1 investment in the S&P 500 index grows to $4.79 during the same time period. Note that the cumulative monthly return for all hedge funds is above that for the S&P 500 until the end of 1996. The substantial growth in the US equity markets from 1997 to 1999 gives the S&P 500 a huge lift, which contributes to the final result of this horserace between hedge funds and the S&P 500 index. Note that survivorship bias may play an important role here: The TASS database starts to collect liquidated funds only from 1994, the superior performance of hedge funds prior to 1994 may be from ignoring the dead funds. According to Figure 1, the live fund group significantly outperforms both the dead fund group and all hedge funds (including both the living the dead funds). For example, a $1 investment in the dead funds grows to only $1.84, comparing to $3.99 in the live funds. The performance difference between the live and the dead funds is significant only after 1994. Again, this may be related to survivorship bias. We will discuss the survivorship bias issue in the next section. Although the S&P 500 index wins the competition during this 10-year period, the index is more volatile than hedge funds as a group. From January 1990 to July 1999, the standard deviations of monthly returns for the S&P 500 index, all hedge funds, the live funds, and the dead funds are 3.89%, 1.67%, 1.70%, and 1.91%, respectively. Therefore, the S&P 500 index is much more volatile than the overall hedge fund markets. 3 As pointed out by the previous studies, hedge fund strategies are less correlated with each 4
  7. 7. other and they have low correlations with the traditional asset classes (see Fung and Hsieh (1997), Ackermann, McEnally, and Ravenscraft (1999), and Liang (1999)). Hedge funds can effectively reduce their risk by doing dynamic hedging, combining both long and short positions, and diversifying their portfolios across different financial markets. Note that the dead fund group has a higher volatility than the live fund group. Their trading strategies are riskier than the live funds, which may attribute to their disappearance. To compare risk-adjusted returns, we calculate the Sharpe ratios. The Sharpe ratios are 0.27, 0.41, 0.48, and 0.08 for the S&P 500 index, all hedge funds, the live funds, and the dead funds, respectively. Hence, on a risk-adjusted basis, hedge funds outperform the S&P 500 index during the period from January 1990 to July 1999. However, we need to be more cautious when explaining this result since we may underestimate the survivorship bias in early years when dead funds are not available to data vendors. Survivorship Bias. Survivorship bias results from the fact that poor performed funds disappear over time and calculation of fund returns based on survived funds only can generate an upward bias in fund returns. So far, different studies about hedge fund survivorship bias report different results. For example, Fung and Hsieh (1998) document an annual survivorship bias of 1.5%. Brown, Goetzmann, and Ibboston (1999) report an annual survivorship bias of 3% for offshore funds.4 However, Ackermann, McEnally, and Ravenscraft (1999) indicate that the survivorship bias is small at an average magnitude of 0.16% per year. Liang (2000) reconciles the conflicting results about survivorship bias in the above studies by showing that two major hedge fund databases contain different amounts of dissolved funds, hence different estimates on survivorship bias. 5
  8. 8. Table 2 shows that hedge funds have an average attrition rate of 8.54% per year. On average, there are about 8.54% funds that disappeared each year. If the main reason for a fund’s disappearance is poor performance, then an upward survivorship bias will exist in fund returns.5 In Table 3, we show that the average monthly returns for the S&P 500 index, all hedge funds, the live funds, and the dead funds are 1.45%, 1.08%, 1.22%, and 0.55%, respectively.6 There is a substantial return difference between the live group and the dead group. Following previous literature, we calculate survivorship bias as the return difference between the survived funds and all funds. The result indicates that the bias is 0.14% per month or 1.69% per year during the ten-year period. Note that TASS collected the dead fund data starting in 1994, therefore a meaningful calculation of survivorship bias should be based on data from 1994 and on. As a result, the return difference between the survived funds and all funds during the period from 1994 to 1999 is as high as 0.2% per month or 2.43% per year. This is higher than the 1.69% from the whole ten- year period. Hence, the survivorship bias of hedge fund returns should be 2.43% per year, which compares with the 1.5% bias in Fung and Hsieh (1998), the 3% bias in Brown, Goetzmann, and Ibboston (1999) for offshore funds, and the 2.24% bias in Liang (2000). The positive survivorship bias confirms that the main reason for a fund’s disappearance is poor performance. Hedge Funds in 1998 1998 was a disaster year for the hedge fund industry. On August 17, Russia defaulted its ruble debt and domestic dollar debt. Trading in Russian debt was halted, the stock market tumbled, and the ruble was depreciated. The crisis in Russia soon spread to the 6
  9. 9. financial markets in other countries and caused a panic among investors. In response, investors’ money flowed to high quality debt instruments such as the US Treasury securities and other government debt. Credit spread widens between the high quality and risky debts. This credit spread widening reverses a multiyear trend toward spread tightening. In addition, due to massive sell-offs, liquidity risk premium also increases for corporate bonds, mortgage-backed securities, and other illiquid securities. As a result, many hedge funds like the Long-Term Capital Management that is betting on convergence in yield spreads and invest heavily in the fixed-income security markets, suffer tremendous losses and face margin calls from their lenders. Under pressure, hedge funds are forced to liquidate their portfolios, to deleverage their positions, or to go out of business. Consequently, hedge fund lenders such as investment banks, commercial banks, brokerage houses, and other counterparties tighten their credit to hedge funds although some of them seldom requested a collateral or a “haircut” before. 7 This kind of credit squeeze, together with investor withdrawal, creates more pressure and losses for hedge funds because hedge funds such as fixed income arbitrage funds and global macro funds rely heavily on leverage to achieve large positions and to boost returns. Monthly Returns. Here we examine hedge fund returns in each month of 1998 and also look at the first half and the second half of 1998. Figure 2 shows the 12 monthly returns for hedge funds in 1998. We expect that August is the worst month for many hedge funds since the default on Russian debt triggered a ripple effect to the global economy. As a matter of fact, the loss in August is as high as 4.88% for all the funds we 7
  10. 10. studied, far beyond the gains and losses in other months. However, there was some recovery in September and October after the Fed coordinated 14 of the largest financial institutions to bailout the Long-Term Capital Management and further lowered the key interest rates to ease the crisis. By November, the Long-Term Capital Management had already made profit, and returned $2.6 billion of the $3.63 billion the bailout group injected into the fund. The fund’s founder John Meriwether had been approved by the 14 institutions to launch a new hedge fund. As a group, hedge funds are able to generate returns of 2.36% and 1.95% in November and December of 1998, respectively. During the first seven months of 1999, hedge funds were able to produce an average monthly return of 1.44% from January 1999 to July 1999. When we further break down 1998 into two-halves, we find that the average monthly return in the first half is 0.61%, comparing with –0.12% in the second half. The difference is statistically significant at the 1% level (t=5.99). Hence, the poor performance if hedge funds in 1998 was mainly driven by the second half when the global financial markets experienced profound turbulence. Death versus Birth. We may expect that more funds died in 1998 than in other years. As a matter of fact, Table 4 shows that in 1998, 179 funds died (29.4% of the 609 dead funds) and 202 funds were born. The total number of dead funds in 1998 was the highest during the period of 1994 to 1998 while the total number of newborn funds was the lowest during the same time period. In fact, the fund attrition rate in 1998 was 13%, much higher than the 8.5% average from 1994 to 1999 (see Table 2). In addition, Table 4 shows that, among the 179 dead funds, 69 died in the first half and 111 died in the second 8
  11. 11. half. In contrast, among the 202 newborn funds, 117 were born in the first half versus 85 in the second half of 1998. Fee Changes and Fund Performance. Once determined, hedge funds seldom change their fee structures. The median management fee is 1% of fund assets and the median incentive fee is 20% of profits (see Ackermann, McEnally, and Ravenscraft (1999) and Liang (1999)). In general, the management fees and incentive fees are very stable over time for hedge funds. For example, for the 2,016 funds we studied, there are only 12 funds that changed management and/or incentive fees from 1997 to 1998.8 These fee changes and the corresponding fund performance in 1998 are reported in Table 5. Among the 12 funds, there are 8 funds that dropped their management fees and 4 funds that increased their management fees. In contrast, there are 7 funds that dropped incentive fees while 5 increased incentive fees. The average management fee change for these 12 funds in 1998 was –0.67%, compared to the average incentive fee change of –5.13%. Therefore, both the magnitude of fee reduction and the number of funds that reduce their fees are higher than those funds with increased fees. For the 7 funds with reduced incentive fees, the average monthly return in 1998 is –1.67%, compared with 0.90% for the 5 funds with increased incentive fees. More interestingly, the 7 funds with negative fee changes in 1998 had an average monthly return of 2.14% in 1997 while the 5 funds with positive fee changes in 1998 had an average return of 1.74% in the previous year. The funds with reducing fees performed very poorly in 1998 and were substantially below their performance in 1997. It seems that poor performance is a major factor for a fund to reduce its incentive fee. This is 9
  12. 12. consistent with the design of incentive fees. The result also suggests that a fund changes its incentive fee not only based on the current year’s performance but also based on last year’s performance. Conclusion Using a large sample, we investigate the hedge fund performance and risk over a 10- year period from 1990 to 1999. In particular, we examine the year 1998 to see the impact of the global financial crisis on the hedge fund industry. We also study the survivorship bias issue for hedge funds. Hedge funds enjoy sizable returns during this 10-year bull market period. The average annualized return is 14.2% for all hedge funds, compared to 18.8% of the S&P 500 index. Although the total return for the index is higher than that of the hedge funds, hedge funds as a group are much less volatile than the index due to cross-style diversification, dynamic hedging, cross-border investing, and varieties of non-traditional financial instruments used. During this time period, hedge funds have a Sharpe ratio of 0.41, much higher than 0.27 for the index. It seems that hedge funds offer better risk- return trade-off than pure equity trading strategies. Empirical results show that the average survivorship bias for hedge fund returns is 2.4% per year. Hedge funds as a whole are severely affected by the economic crisis in 1998. There are more funds that died than in any other year, especially in the second half of 1998 when Russia defaulted its debt. In 1998, the number of dead funds is the highest and the number of newborn funds is the lowest since 1993. 1998 also has the highest volatility in hedge fund returns. In general, there are very few funds that change incentive fees and 10
  13. 13. management fees. Changes in fees are performance-related: poorly performed funds in 1998 dropped their incentive fees. This is consistent with the design of incentive fees. I would like to thank H. Gifford Fong (the editor) for his comments. The paper is supported by a research grant from the Weatherhead School of Management at Case Western Reserve University. I am grateful to TASS Management Limited for providing the data. 11
  14. 14. References Ackermann, C., R. McEnally, and D. Ravenscraft, 1999. “The Performance of Hedge Funds: Risk, Return and Incentives.” Journal of Finance, vol. 54, no. 3 (June):833-874. Brown, S. J., W. N. Goetzmann, and R. G. Ibbotson, 1999. “Offshore Hedge Funds: Survival & Performance 1989-95.” Journal of Business, vol. 72, no. 1 (January):91-117. Brown, S. J., W. N. Goetzmann, R. G. Ibbotson, and S. A. Ross, 1992. “Survivorship Bias in Performance Studies.” Review of Financial Studies, vol. 5, no. 4 (Winter):553-580. Brown, S. J., W. N. Goetzmann, and J. Park, 1999. “Conditions for Survival: Changing Risk and the Performance of Hedge Fund Managers and CTAs.” Forthcoming, Journal of Finance. Fung, W., and D. A. Hsieh, 1998. “Performance Characteristics of Hedge Funds and CTA Funds: Natural Versus Spurious Biases.” Forthcoming, Journal of Financial and Quantitative Analysis. Fung, W., and D. A. Hsieh, 1997a. “Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds.” The Review of Financial Studies, vol. 10, no. 2 (Summer): 275-302. Fung, W., and D. A. Hsieh, 1997b. “Survivorship Bias and Investment Style in the Returns of CTAs.” The Journal of Portfolio Management, vol. 24, no. 1 (Fall):30-41. Liang, B., 1999. “On the Performance of Hedge Funds.” Financial Analysts Journal, vol. 55, no. 4 (July/August):72-85. 12
  15. 15. Liang, B., 2000. “Hedge Funds: The Living and the Dead.” Forthcoming, Journal of Financial and Quantitative Analysis. Malkiel, B. G., 1995. “Returns from Investing in Equity Mutual Funds, 1971 to 1991.” Journal of Finance, vol. 50, no. 2 (June):549-572. 13
  16. 16. Note: 1. The other big name is Van Hedge Fund Advisors, but their data is not available to academics. In general, hedge funds report to data vendors voluntarily. Because hedge funds are not allowed to advertise to the public, hedge funds view this voluntary reporting as a way to distribute their fund information and attract investors for more assets. 2. Although the styles are overlapping, all live funds and dead funds are classified under these style definitions. Following these definitions, we can minimize the survivorship bias problem. 3. Hedge funds as a group have low volatility since different investment strategies are less correlated, but individual styles or individual hedge funds may still be very volatile, depending on what investment strategy and what financial instruments are used. 4. Liang (1999, 2000) indicates that offshore funds are riskier than onshore (US) funds. 5. One may argue that hedge funds voluntarily stop reporting to data vendors because they are doing so well and do not need any more investors. This explanation is unlikely the major reason for a fund’s disappearance because disappeared funds significantly underperform the survived funds. 6. The 1.08% return for all funds is slightly different from 1.11% in Table 1 because the investment styles in Table 1 are overlapping. 14
  17. 17. 7. A haircut is the difference between the market value of an asset posted as collateral and the value attributed to such an asset by a lender in determining whether the collateral has been met. 8. Funds that died before 1997 may have also changed fees but we don’t have the fee information to evaluate them. 15
  18. 18. Table 1. Hedge Fund Returns by Investment Strategies: 1990-1999 Strategy 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999* Avg. Top down macro 0.85 1.21 1.99 2.12 1.22 1.67 2.71 1.68 -0.21 1.87 1.05 1.43 1.43 1.98 1.45 2.68 -0.38 3.62 1.77 2.35 1.19 Bottom up 0.58 2.03 2 1.75 1.21 1.63 2.35 1.23 -0.02 1.68 1.32 1.25 1.57 1.71 1.48 2.56 0.28 3.89 2.17 2.42 1.29 Short selling 1.01 0.99 1.58 1.12 1.26 1.09 1.92 1.06 0.1 0.94 1.32 0.96 1.31 1.37 1.39 2.04 0.54 2.81 1.74 1.96 1.22 Long bias 0.46 2.28 2.2 2.01 1.32 1.92 2.34 1.39 -0.12 1.93 1.25 1.4 1.48 1.86 1.55 2.78 0.1 4.49 2.34 2.81 1.29 Market neutral 0.73 1.05 1.4 0.79 1.07 0.75 1.71 0.76 0.14 0.71 1.08 0.53 1.08 0.72 1.1 0.82 0.37 1.46 1.17 0.64 0.99 Opportunities 0.93 1.53 2.01 1.73 1.3 1.53 2.3 1.26 0.09 1.38 1.37 1.14 1.58 1.74 1.51 2.31 0.11 3.36 2.00 2.28 1.32 Relative value 0.63 1.23 1.58 1.88 1.11 0.9 2.31 1.21 -0.04 1.33 1.09 0.93 1.3 1.07 1.23 1.58 -0.01 2.72 1.64 1.69 1.08 Arbitrage 0.97 0.8 1.24 1.09 1.16 0.98 2.17 0.95 0.05 0.92 1.23 0.75 1.21 0.88 1.27 1.13 0.1 2.03 1.47 1.02 1.09 Discretionary 1.38 1.45 1.27 3.35 0.84 1.62 1.86 1.61 0.11 0.91 1.07 1.2 1.05 1.74 1.09 2.21 0.02 1.8 1.26 1.67 1.00 Trend Follower 2.63 3.62 1.35 6.02 0.53 4.27 1.55 2.42 -0.18 2.06 1.32 2.68 1.03 3.22 0.9 2.95 0.84 2.28 0.34 2.11 1.03 Technical 2 2.45 1.16 4.28 0.52 2.52 1.59 1.81 -0.11 0.29 1.11 1.77 1.01 2.38 1 2.37 0.65 1.31 0.64 1.76 0.96 Fundamental 1.13 0.91 1.65 1.99 1.03 0.95 1.99 1.16 -0.02 1.18 1.13 0.97 1.31 1.58 1.34 2.4 0.11 3.00 1.7 2.08 1.14 Systematic 2.28 2.91 1.32 4.88 0.6 3.09 1.56 1.89 -0.38 1.53 1.1 1.96 1.07 2.66 1.05 2.63 0.57 1.4 0.46 1.94 0.96 Diverse 1.6 1.13 1.32 2.46 0.91 1.02 2.2 1.46 -0.16 1.1 1.11 1.38 1.33 2.14 1.18 2.51 0.15 1.86 1.1 1.8 1.07 Other 1.04 0.77 0.92 0.8 1.14 0.9 1.65 0.87 0 0.79 1.13 1.2 1.18 1.01 1.13 1.86 0.3 2.46 1.67 1.96 1.02 Average 1.21 1.62 1.53 2.42 1.01 1.66 2.01 1.38 -0.05 1.24 1.18 1.30 1.26 1.74 1.24 2.19 0.25 2.57 1.43 1.90 1.11 Note: The TASS data contains 2,016 funds, including 1,407 live funds and 609 dead funds. Calculations are based on 1,921 funds with returns net of all fees and with monthly returns only. *As of July 1999. 14
  19. 19. Table 2. Hedge Fund Attrition Rate: 1993-1999 Year Start Funds born Funds died Year end Attrition Rate (%) Pre-1993 540 1993 540 234 774 1994 774 242 32 984 4.13 1995 984 229 77 1,136 7.83 1996 1,136 245 142 1,239 12.50 1997 1,239 262 124 1,377 10.01 1998 1,377 202 179 1,400 13.00 1999* 1,400 60 53 1,407 3.79 Total 2,014** 607** 8.54 Note: The attrition rate the defined as the ratio of the number of funds died during a year to the number of funds at the beginning of the year. *Through July 1999 **Two funds with unknown birth date and death date 15
  20. 20. Table 3. Hedge Fund Survivorship Bias: 1990-1999 Year S&P500 (%) All funds (%) Live funds (%) Dead funds (%) Bias (%) 1990 -0.14 1.47 1.32 1.80 -0.15 (5.31) (1.13) (1.03) (1.96) 1991 2.34 1.53 1.70 1.15 0.18 (4.56) (2.50) (2.45) (2.70) 1992 0.64 0.91 0.94 0.87 0.03 (2.13) (1.04) (1.01) (1.30) 1993 0.81 1.81 2.05 1.45 0.24 (1.77) (1.25) (1.40) (1.19) 1994 0.15 -0.09 0.02 -0.25 0.11 (3.04) (0.92) (1.03) (0.83) 1995 2.70 1.14 1.49 0.53 0.36 (1.50) (1.10) (1.23) (1.04) 1996 1.79 1.26 1.52 0.65 0.26 (3.15) (1.60) (1.71) (1.40) 1997 2.52 1.26 1.41 0.62 0.16 (4.60) (2.12) (2.12) (2.22) 1998 2.30 0.25 0.44 -1.31 0.19 (6.21) (2.13) (2.13) (2.16) 1999* 1.29 1.44 1.47 -0.43 0.03 (3.93) (1.80) (1.80) (1.88) Average 1.45 1.08** 1.22 0.55 0.14 Note: The survivorship bias is calculated as the monthly return difference between survived funds and all funds. *Till July 1999 **Slightly different from 1.11% in Table 1 because the styles are overlapping in Table 1. 16
  21. 21. Table 4. Numbers of Funds that Were Born and Died in 1998 Month Birth Death 9801 36 6 9802 15 8 9803 16 13 9804 19 13 9805 16 8 9806 15 20 9807 32 29 9808 20 18 9809 9 17 9810 2 14 9811 8 11 9812 14 22 Total 202 179 17
  22. 22. Table 5. Fund Fee Changes and Performance in 1998 Fund 1998 return (%) Incentive fee Management fee change (%) change (%) 1 -1.91 -20.0 0.50 2 -0.57 -20.0 -2.75 3 2.17 2.5 1.00 4 -8.95 -5.0 -0.50 5 0.18 20.0 1.00 6 -0.53 -20.0 -1.50 7 0.62 -5.0 -0.50 8 1.01 5.0 -0.10 9 0.16 20.0 1.00 10 0.96 5.0 -1.00 11 0.05 -24.0 -3.50 12 -0.39 -20.0 -1.70 Average -0.60 -5.13 -0.67 Note: If a fund changes fees, it usually occurs at the year-end. Therefore the fee change here is from the end of 1997 to the end of 1998. The difference is the fee in 1998 minus the fee in 1997. 18
  23. 23. Cumulative return 0 1 2 3 4 5 6 date 9004 9008 9012 9104 9108 9112 9204 9208 9212 9304 9308 9312 9404 9408 Date 9412 19 9504 9508 9512 9604 9608 9612 Figure 1. Hedge Fund Returns versus S&P 500 9704 9708 9712 9804 9808 9812 9904 All Live Dead sp500
  24. 24. Figure 2. Hedge Fund Returns in 1998 4 3 2 1 0 Jan Feb M ar Apr M ay Jun Jul Aug Sep Oct Nov Dec Month -1 -2 -3 -4 -5 -6 Return (%) 20

×