New research suggests there are significant biases introduced by delays to and clustering of performance reports to databases, Martin Steward reports.

It is well known that databases of historical hedge fund returns suffer from a range of biases - chiefly ‘survivor bias’. The worst funds cease reporting their results, sometimes simply because they go out of business, and some of the best also stop reporting when they no longer need to advertise their performance to raise assets.

But new research presented at the 4th Lyxor/NYSE Liffe Hedge Fund Research Conference in Paris by George Aragon of Arizona State University suggests there are also significant biases introduced by delays to and clustering of performance reports to databases.

In a paper co-authored with Vikram Nanda of the Georgia Institute of Technology, Aragon examines data gathered since January 2009 by monitoring daily changes to a closely followed database of hedge funds. He finds that reporting delays are longer when performance is worse, and that those who delay often disclose returns for two or three periods in clusters - which, on average, show earlier, poorer results being reversed by later, better ones.

“This is an important issue for performance measurement,” Aragon told IPE on the fringe at the conference. “Some data vendors already provide the precise date on which a fund began reporting. Likewise, it would also be useful for data providers to include the precise date of reporting in their disclosures, and possibly also the archive they may have of historical reporting dates.”

He added that he would be reluctant to suggest that databases should be more proscriptive or prescriptive about when and how frequently funds should report because there could be perfectly valid reasons for delays.

Reporting early could involve information leakage that impairs a strategy’s competitiveness, for example, and marking assets to market can be a challenge during liquidity shocks. In the face of difficult markets, reporting to a database may simply not be a manager’s top priority.

However, while it cannot rule-out these more ‘innocent’ explanations, Aragon and Nanda’s paper explicitly suggests that these are “strategic” decisions, and the results show that the correlation of poor performance and delayed reporting remains significant across all funds - which all face the same market conditions at the same time. One might assume that a good manager would be just as consumed by tricky markets as a bad one, but the good managers still manage to report results earlier, on average.

Indeed, the paper also finds evidence that investors may attach a negative connotation to delays in reporting: flows into funds are significantly lower when delays are longer, even when controlled for the influence of poor performance.

“It is possible investors are taking the view that delays to reporting are a negative signal,” said Aragon, “although we need to acknowledge that what goes onto the database may not necessarily be the same reporting that existing investors actually receive.”