Hedge Fund Database “Deconstruction”:
Are Hedge Fund Databases Half Full or Half Empty?

Abstract

While the impact of backfill bias, survivor bias, and other database construction issues (e.g., onshore versus offshore) on hedge fund performance have received considerable research attention, the impact on hedge fund performance of differences in the underlying quality or number of reporting managers in various hedge fund databases has often been underreported. Most major hedge fund databases rely on manager-based reporting. As a result, database quality is dependent on managers’ updating requested data. In addition, hedge fund databases were created and grew at different times. Thus, large differences in the number of managers reporting as well as differences in other fund platform characteristics may exist between various databases. If these databases contained enough manager breadth and depth, results at the portfolio level could be similar across various databases; however, differences may still exist at the average manager level, especially for small subsets of analyses (e.g., strategy, fee level, etc.). In this analysis, the authors compare performance characteristics of two major databases often used in hedge fund analysis (CSFB/Tremont and CISDM). More specifically, they compare performance results at the strategy level for 1) all reporting funds, 2) funds denominated only in U.S. dollars, and 3) a cleaned set of funds with duplicates removed (e.g., multiple share classes or currencies). Results show some return and risk differences between the two databases at the portfolio and average manager levels. These differences, however, are often relatively small. In the end, the impact of database usage and the necessity of “deconstructing” one’s database depends, in part, on whether one views the glass as half full or half empty.