The mystery of “slightly positive results” in hedge funds and college basketball
Nov 18th, 2007 | Filed under: Performance, Analytics & MetricsThere has been some talk recently of hedge fund managers misreporting returns to the various voluntary databases that collect such information. According to a study by Nicolas Bollen of Vanderbilt and Veronika Pool of Indiana University, hedge fund managers show a curious propensity to have more slightly positive months than they do to have flat or slightly negative months. In fact, the study found that up to 10% of fund returns in one major database are statistically “distorted”.
You don’t have to be a statistician to see it (chart below).
According to the study, hedge fund managers also seem to have smoother returns when they are performing poorly. Researchers conjecture that this is because managers have an ability to “manage earnings” and are more likely to do so when their returns stink. That way, at least they can reduce volatility and goose their Sharpe ratio even if returns are lackluster.
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[…] “When it comes to hedge funds, the bottom line seems to be clear: don’t rely on the “percent positive months†metric when buying a hedge fund…” (All About Alpha) […]
The Penn article was laughably wrong. Vegas does not set unbiased lines. Vegas does not try to attract ‘equal action,’ known as the Myth of Equal Action among gamblers.
Certain teams, like Duke, UCLA, Yankees, ND, etc and large favorites attract more money.
The book sets their lines ‘higher’ to force favorite bettors to pay a ‘tax.’
Since the line is purposefully higher than a line set merely to attract equal action, favorites don’t cover as much. This is all well-known and established in gambling markets. Ask any LV bookmaker, they freely admit it because Duke fans don’t stop betting Duke because the line is -22 instead of -20.5.
In addition, for really big spreads, it is likely the coach has put the scrubs in. 1st team of the other team can usually narrow the lead on the scrubs.
[…] “Hedge funds come unstuck on truth-twisting”: Aussie newspaper The Age provides a great example of why AIMA felt compelled to put its foot down on anti-hedge fund hype yesterday.  The article covers a recent academic study and starts with “Has the hedge-fund industry been built on a series of lies?” and continues on to proclaim, “Now it looks as if the industry might be based on a more systematic falsehood”, “The conclusion? The promise on which the industry was built looks to be largely a false one. If investors start to question the hedge funds’ ability to produce consistently superior returns, they will start to exit the industry in droves - and rightly so.” (see November ‘07 posting on this study) […]