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Hedge Fund Biases

Smoothed Pricing of Infrequently Traded Assets

Some of the assets are not widely traded in the market and marked to market with the help of broker or dealer. These values estimated by dealers are more stable over the time and reduces reported volatility of fund.

Self Selection Bias

Fund manager may not disclose his poor performance and may include only successful track records.

Back Filling Bias
Fund managers with poor performance may not participate in hedge fund index, which leads to overestimated performance of hedge fund industry.

Survivorship Bias
Only best performing hedge funds survive in this industry and thus only funds with successful track records are likely to be included in calculating index.

Option Like Strategies
Some of the option strategies may have asymmetric payoff which may not be fully reflected by standard deviation or Value at risk. 

Fee Structure & Gaming
Fee structure is designed in a such a way that manager is paid small fixed amount & large variable component based on the performance of fund. It may compel managers to take a big bets in order to get higher remuneration. 


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