Key Takeaways
- • Academic research by Adam Aiken (Elon University), Christopher P. Clifford (University of Kentucky), and Jesse Ellis (North Carolina State University) reveals significant selection bias in hedge fund performance databases, with reporting funds substantially outperforming non-reporting funds.
- • The peer-reviewed study "Out of the Dark: Hedge Fund Reporting Biases and Commercial Databases," published in *The Review of Financial Studies* in January 2013, directly compared performance data from funds that voluntarily report to commercial databases versus those that do not, exposing systematic performance inflation in industry benchmarks.
- • FundFire, an online asset management publication with over 80,000 readers, cited the research in a February 17, 2016 article titled "Hedge Fund 'Winners' Inflate Database Returns: Study," indicating sustained institutional interest in understanding database reporting biases.
- • Industry practitioners including Peter Laurelli (eVestment), Sheryl Mejia (Decagon Advisors), Abby Flamhol (Worth Venture Partners), and David Russell (Investment Performance Services) provided commentary on the study's implications for asset management.
Summary
Research co-authored by Adam Aiken, assistant professor of finance at Elon University's Martha and Spencer Love School of Business, received prominent coverage in FundFire's February 17, 2016 publication. The work examines a critical structural flaw in how the hedge fund industry measures and reports performance: the voluntary nature of database reporting creates significant selection bias that systematically inflates industry performance metrics.
The foundational study, "Out of the Dark: Hedge Fund Reporting Biases and Commercial Databases," was published in *The Review of Financial Studies* in January 2013 and co-authored with Christopher P. Clifford at the University of Kentucky and Jesse Ellis at North Carolina State University. The research methodology directly compared actual performance returns from hedge funds that voluntarily report to commercial databases against returns from funds that do not report, creating a natural experiment to isolate reporting bias effects.
The paper's core finding is straightforward but consequential: funds choosing to report their performance to commercial hedge fund databases significantly outperform those that do not. This disparity suggests that worse-performing managers systematically avoid public reporting, leaving commercial databases populated disproportionately with superior performers. The implication for institutional investors is material—published hedge fund indices and benchmarks may materially overstate the true average performance achievable in the hedge fund market.
FundFire's coverage brought this academic research to an institutional audience of over 80,000 asset management professionals, amplifying its practical relevance. The article cited perspectives from industry figures including Peter Laurelli (global head of research at eVestment), Sheryl Mejia (partner at consulting firm Decagon Advisors), Abby Flamhol (co-founder of Worth Venture Partners), and David Russell (head of manager research at Investment Performance Services), indicating broad recognition of the study's implications for performance benchmarking and manager selection processes.
The foundational study, "Out of the Dark: Hedge Fund Reporting Biases and Commercial Databases," was published in *The Review of Financial Studies* in January 2013 and co-authored with Christopher P. Clifford at the University of Kentucky and Jesse Ellis at North Carolina State University. The research methodology directly compared actual performance returns from hedge funds that voluntarily report to commercial databases against returns from funds that do not report, creating a natural experiment to isolate reporting bias effects.
The paper's core finding is straightforward but consequential: funds choosing to report their performance to commercial hedge fund databases significantly outperform those that do not. This disparity suggests that worse-performing managers systematically avoid public reporting, leaving commercial databases populated disproportionately with superior performers. The implication for institutional investors is material—published hedge fund indices and benchmarks may materially overstate the true average performance achievable in the hedge fund market.
FundFire's coverage brought this academic research to an institutional audience of over 80,000 asset management professionals, amplifying its practical relevance. The article cited perspectives from industry figures including Peter Laurelli (global head of research at eVestment), Sheryl Mejia (partner at consulting firm Decagon Advisors), Abby Flamhol (co-founder of Worth Venture Partners), and David Russell (head of manager research at Investment Performance Services), indicating broad recognition of the study's implications for performance benchmarking and manager selection processes.
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