Hedge fund lies, darned lies and statistics...

A 2007 article in the Journal of Portfolio Management asked “Why Do Hedge Funds Stop Reporting Performance?” Well respected finance academics examined what is called “survivorship bias.” In other words, they tried to figure out how many funds volunteer not to report really bad performance.

The authors suspect that over the long term, annualized returns might be 3.0% worse in real life than reported in the “voluntary” indexes and represented with certainty by consultants.

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So imagine our surprise this year. At the peak of the hedge fund frenzy in the second quarter of 2008, there were 1560 fund of funds reporting results to HFR, the “unofficial” scorekeeper. (By the way, fund of funds managers earn extra fees on top of the high hedge fund and profit-sharing of the individual funds). At the end of last year’s carnage, only 1,066 funds of funds were still reporting results to HFR.