CBS MoneyWatch – While reviewing the latest round of papers and articles on hedge funds, I was reminded of the film “Night of the Living Dead” — no matter how many zombies were killed, more kept coming back. In 2008, about 1,500 funds were liquidated and 500 launched. The next year, about 1,000 were liquidated, and more than 500 new ones launched.
The risk of a hedge fund dying (shutting down) is so great that a 2005 study, “Hedge Funds: Risk and Return,” by Burton G. Malkiel and Atanu Saha, found that survivorship bias in the reported data on hedge fund returns creates an incredibly large upward bias of 4.4 percent per year. The same study found that less than 25 percent of the funds in existence in 1996 were still alive in 2004! The difference in returns between the live and defunct funds exceeded 8 percent per year (13.7 versus 5.4).
