Forthcoming: Financial Analysts Journal
Hedge Fund Performance: 1990-1999
Weatherhead School of Management
Case Western Reserve University
Cleveland, OH 44106
Phone: (216) 368-5003
Fax: (216) 368-4776
Current Version: February 2000
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.
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
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.
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,
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
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
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
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.
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
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
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
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
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
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
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
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
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
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Funds: Risk, Return and Incentives.” Journal of Finance, vol. 54, no. 3
Brown, S. J., W. N. Goetzmann, and R. G. Ibbotson, 1999. “Offshore Hedge Funds:
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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
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
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
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.
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.
Table 2. Hedge Fund Attrition Rate: 1993-1999
Year Start Funds born Funds died Year end Attrition Rate
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
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
*Till July 1999
**Slightly different from 1.11% in Table 1 because the styles are overlapping in Table 1.
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
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.
Figure 1. Hedge Fund Returns versus S&P 500
Figure 2. Hedge Fund Returns in 1998
Jan Feb M ar Apr M ay Jun Jul Aug Sep Oct Nov Dec