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Study: Hedge funds can go the distance


Date: Monday, June 5, 2006
Author: Aaron Siegel

Contrary to common wisdom, a new study says that many hedge funds can outperform their benchmarks consistently, according to published reports.

Studies that found that hedge funds performed strongly in a sprint but not for the long haul were flawed, says this study, because they failed to correct fully for statistical problems in databases of hedge fund returns.

According to "Do Hot Hands Persist Among Hedge Fund Managers? An Empirical Evaluation," the misconception comes from a "self-selection bias" whereby good performers close to new investors, stop reporting their performance and therefore vanish from the databases.

The study found funds closed to new investors as a result of good performance were more likely to be above-average performers in the period after they closed.

The study, issued by the National Bureau of Economic Research, a nonprofit and nonpartisan research organization based in Cambridge, Mass.

It was written by Ravi Jagannathan, a finance professor at Northwestern University; Alexey Malakhov, an assistant professor of finance at the University of Arkansas; and Dmitry Novikov, an associate in the office of equity derivatives strategy at Goldman Sachs in New York.

The study will be presented later this month at the annual meeting of the equity derivatives strategy at Goldman Sachs in New York. Western Finance Association in Keystone, Colo.