Question

You found a public database for hedge fund returns and are eager to do some data analyses on hedge funds in general using the database. Your colleague found out that the hedge funds in the database were under no pressure to report their performance to anyone outside the funds. Based on her finding, she argues that the returns in the public data are likely to be biased upward. Would you agree? Why or why not? Briefly explain.

Answer 1

Yes, I will agree that returns for hedge fund are not adequately reflected because those hedge funds returns are biased upwards because they are not in synchronisation with the market rate of return with respect to the volatility because these returns are always accused of being negatively skewed.

The returns of hedge funds are generally not performing in line with the benchmark index in past several decades when it is being adjusted for the volatility of the index and generally these returns are trying to reflect that hedge funds are performing better than the overall index but hedge funds are generally not performing better than Index, when it is adjusted for the volatility of the index because hedge fund are generally less volatile when it is compared to the overall volatility of the index.

Systematic rate of return is not followed while reporting of these hedge fund returns because they are not adjusting in with the return of the volatility so these are generally characterized by generating a uniform rate of return but they are also characterized by generating extreme losses which can possibly eliminate all those small gaines.

So, The Hedge fund returns are negatively skewed and hedge funds are under no pressure to report their performance according to the standard set, so their performance in the public domain are modified accordingly and manipulated through non disclosure requirements as per the convenience of these hedge funds in order to reflect the performance of the Hedge fund as better than performance of the overall market. So, it can be said that the hedge fund returns are not reflecting the appropriate performance of The Hedge funds as they are negatively skewed and they are not in line with the volatility and they are actively manipulated according to the convenience of these fund managers to reflect their outperformance while being compared to the market.