Laurent Bodson

Is There a Link between Past Performance and Fund Failure

Mutual fund survivorship has been an ongoing concern since the early 1990s for different reasons. Many researchers have studied this phenomenon because of the so-called survivorship bias. Indeed, ignoring the funds that disappear while analyzing the performance of funds generates an important bias – since the funds that failed during the period are omitted, only the funds that were alive during the whole period are selected. Another stream of papers has focused on the assessment of the percentage of ’graveyard’ funds, that is, those that disappear within a certain period. Fewer have aimed to examine the determinants of the fund terminations.

Normalized Risk-Adjusted Performance Measures Revisited: The Performance of Funds of Hedge Funds Before and After the Crisis

This chapter revisits the performance of funds of hedge funds (FoHFs) after the global financial crisis using normalized risk-adjusted performance measures based on multifactor models. (i) We develop performance measures able to capture the variety of systematic risk sources. (ii) We deal with the impact of smoothing on the risk return properties of FoHFs using an adjustment technique for illiquidity. (iii) We implement unbiased estimators to correct for the econometric bias induced by errors-in-variables (EIVs) in asset pricing models. With these different adjustments, we analyze the persistence and stability of performance measures before and after the crisis for a database of funds of hedge funds. Our results clearly show that the normalized risk-adjusted performance measures corrected for smoothing effect and EIVs outperform the alternatives measures before and after the crisis.