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The Journal of Alternative Investments

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Primary Article

Welcome to the Dark Side

Hedge Fund Attrition and Survivorship Bias Over the Period 1994–2001

Gaurav S. Amin and Harry M. Kat
The Journal of Alternative Investments Summer 2003, 6 (1) 57-73; DOI: https://doi.org/10.3905/jai.2003.319083
Gaurav S. Amin
A manager at Schroder Hedge Funds in London.
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  • For correspondence: gaurav.amin@schroders.com
Harry M. Kat
Professor of risk management and director of the Alternative Investment Research Centre, Cass Business School, City University, London.
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  • For correspondence: harry@harrykat.com
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Abstract

Hedge funds exhibit a high rate of attrition that has increased substantially over time. Lack of size, lack of performance and an increasingly aggressive attitude of old and new fund managers alike appear to be the main factors behind this phenomenon. Although attrition is high, survivorship bias in hedge fund data is modest, which reflects the relatively small difference in performance between surviving and defunct funds. Concentrating on survivors only will overestimate the average hedge fund return by around 2% per annum. For small, young, and leveraged funds, however, the bias can be as high as 4%–5%. The authors also find significant survivorship bias in estimates of the standard deviation, skewness, and kurtosis of individual hedge fund returns. When not corrected for, this will lead investors to seriously overestimate the benefits of hedge funds. Fund of funds attrition is much lower. Combined with the small difference in performance between surviving and defunct funds of funds, this yields relatively low survivorship bias estimates for funds of funds.

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The Journal of Alternative Investments
Vol. 6, Issue 1
Summer 2003
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Welcome to the Dark Side
Gaurav S. Amin, Harry M. Kat
The Journal of Alternative Investments Jun 2003, 6 (1) 57-73; DOI: 10.3905/jai.2003.319083

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Welcome to the Dark Side
Gaurav S. Amin, Harry M. Kat
The Journal of Alternative Investments Jun 2003, 6 (1) 57-73; DOI: 10.3905/jai.2003.319083
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