New York Times -CAN hedge funds beat the market? Many of them do so for short periods, of course, but a number of academic studies have generally found that such market-beating funds rarely stay at the top of the rankings for long. For the most part, researchers have concluded that the best-performing hedge funds of one period were rarely the best performers over any significant stretch that followed. That’s a dead giveaway that a hedge fund that happens to beat the market over a given time owes its performance more to luck than to genuine investment ability.
But a new study has reached the opposite conclusion. It has found that many hedge funds can outperform their benchmarks consistently. The study, issued by the National Bureau of Economic Research, a nonprofit and nonpartisan research organization based in Cambridge, Mass., has been accepted for presentation this month at the annual meeting of the Western Finance Association, a scholarly organization. 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. A copy is at nber.org/papers/w12015.
The researchers argue that most previous studies of hedge fund performance were flawed because they failed to correct fully for statistical problems in databases of hedge fund returns. Perhaps the most significant problem, according to Professor Jagannathan, is the one caused by the disappearance of hedge funds from those databases  a problem that he and his co-authors call the “self-selection bias.”
Funds vanish from the databases for two primary reasons. Some funds that are particularly poor performers close down and liquidate. And others, particularly good performers, close their doors to new investors and stop reporting their performance to the databases.
