Skip to main content

Hedge-Fund Benchmarks: Information Content and Biases

Publication ,  Journal Article
Fung, W; Hsieh, DA
Published in: Financial Analysts Journal
January 1, 2002

We discuss the information content and potential measurement biases in hedge-fund benchmarks. Hedge-fund indexes built from databases of individual hedge funds inherit the measurement biases in the databases. In addition, broad-based indexes mask the diversity of individual hedge-fund return characteristics. Consequently, these indexes provide incomplete information to investors seeking diversification from traditional asset classes through the use of hedge funds. The approach to constructing hedge-fund benchmarks we propose is based on the simple idea that the most direct way to measure hedge-fund performance is to observe the investment experience of hedge-fund investors themselves - the funds of hedge funds (FOFs). In terms of measurement biases, returns of FOFs can deliver a cleaner estimate of the investment experience of hedge-fund investors than the traditional approach. In terms of risk characteristics, indexes of FOFs are more indicative of the demand-side dynamics driven by hedge-fund investors' preferences than are broad-based indexes. Therefore, indexes of FOFs can provide valuable information for assessing the hedge-fund industry's performance.

Duke Scholars

Published In

Financial Analysts Journal

DOI

ISSN

0015-198X

Publication Date

January 1, 2002

Volume

58

Issue

1

Start / End Page

22 / 34

Related Subject Headings

  • Finance
  • 3502 Banking, finance and investment
  • 3501 Accounting, auditing and accountability
  • 1502 Banking, Finance and Investment
  • 1501 Accounting, Auditing and Accountability
 

Citation

APA
Chicago
ICMJE
MLA
NLM
Fung, W., & Hsieh, D. A. (2002). Hedge-Fund Benchmarks: Information Content and Biases. Financial Analysts Journal, 58(1), 22–34. https://doi.org/10.2469/faj.v58.n1.2507
Fung, W., and D. A. Hsieh. “Hedge-Fund Benchmarks: Information Content and Biases.” Financial Analysts Journal 58, no. 1 (January 1, 2002): 22–34. https://doi.org/10.2469/faj.v58.n1.2507.
Fung W, Hsieh DA. Hedge-Fund Benchmarks: Information Content and Biases. Financial Analysts Journal. 2002 Jan 1;58(1):22–34.
Fung, W., and D. A. Hsieh. “Hedge-Fund Benchmarks: Information Content and Biases.” Financial Analysts Journal, vol. 58, no. 1, Jan. 2002, pp. 22–34. Scopus, doi:10.2469/faj.v58.n1.2507.
Fung W, Hsieh DA. Hedge-Fund Benchmarks: Information Content and Biases. Financial Analysts Journal. 2002 Jan 1;58(1):22–34.

Published In

Financial Analysts Journal

DOI

ISSN

0015-198X

Publication Date

January 1, 2002

Volume

58

Issue

1

Start / End Page

22 / 34

Related Subject Headings

  • Finance
  • 3502 Banking, finance and investment
  • 3501 Accounting, auditing and accountability
  • 1502 Banking, Finance and Investment
  • 1501 Accounting, Auditing and Accountability