Why Hedge Funds Look Better Than They Are

While many investors do go with a hedge fund approach, we at The Motley Fool have always advocated that the best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Brendan Byrnes: What's "survivorship bias," and how can investors learn or be worried about this?

Jack Schwager: Survivorship bias is just one of many biases, but it's the one that's better known. Survivorship bias is, you have a database of funds, an index of funds like hedge funds. The managers that do poorly, they go away and drive a cab or whatever they do, and the ones who do well continue on.

Now you look at the performance and, in some indexes, the ones who have done poorly, those numbers don't appear anymore, so what you're getting is survivorship bias -- the better ones. It's giving you a misleading picture, because it's not showing you the results of those managers who have dropped out.

That's just one example of a bias that's inherent in hedge fund indexes.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2172253, ~/Articles/ArticleHandler.aspx, 11/21/2014 10:31:07 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement