It is often argued that aggregate hedge fund performance data suffers from a near-fatal flaw: since it is voluntarily reported by the manager, hedge fund indices only include funds that the managers have deemed marketable.  In 2002, David Hsieh of Duke University and William Fung of London Business School wrote a seminal article on this issue called “Benchmarks of Hedge Fund Performance: Information Content and Measurement Biases.”

In contrast, regulations often require mutual funds to register with securities authorities before they can begin to assemble a track record.  As a result, mutual fund data is assumed to be free of such bias.

But as Alan Palmiter and Ahmed Taha, law professors at Wake Forest University write in a forthcoming article for the Vanderbilt Law Review called “Star Creation: The Manipulation of Mutual Fund Performance Through Incubation“, the requirement for a mutual fund to register does not eliminate the problems arising from so-called “mutual fund incubation.”

Observe the professors: More…