Editing Hedge fund (section)

==Performance==
===Measurement===
Performance statistics for individual hedge funds are difficult to obtain, as the funds have historically not been required to report their performance to a central repository, and restrictions against public offerings and advertisement have led many managers to refuse to provide performance information publicly. However, summaries of individual hedge fund performance are occasionally available in industry journals<ref>{{cite web |last=Willoughby |first=Jack |url=http://online.barrons.com/article/SB119101983536943198.html?mod=b_hps_9_0001_b_this_weeks_magazine_home_top |title=High Performance |publisher=Online.barrons.com |date=1 October 2007 |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20111127055545/http://online.barrons.com/article/SB119101983536943198.html?mod=b_hps_9_0001_b_this_weeks_magazine_home_top |archive-date=27 November 2011 |url-status=live |df=dmy-all }}</ref><ref>{{cite news | url=http://online.wsj.com/public/resources/documents/BA_HedgeFund50_071001.pdf | title=Here They Are – The Hedge Fund 50 | work=The Wall Street Journal | access-date=19 October 2007 | archive-url=https://web.archive.org/web/20071128210917/http://online.wsj.com/public/resources/documents/BA_HedgeFund50_071001.pdf | archive-date=28 November 2007 | url-status=live | df=dmy-all }}</ref> and databases.<ref name=Or>{{cite news |url=http://online.wsj.com/article/BT-CO-20110304-711526.html |title=Hedge Fund Assets Near $2.5 Trillion in 2010 |first=Amy |last=Or |work=The Wall Street Journal |publisher=Dow Jones & Company, Inc. |date=4 March 2011 |access-date=3 April 2011 |archive-url=https://web.archive.org/web/20110307040255/http://online.wsj.com/article/BT-CO-20110304-711526.html |archive-date=7 March 2011 |url-status=live |df=dmy-all }}</ref>

One estimate is that the average hedge fund returned 11.4% per year,<ref name=mallaby/> representing a 6.7% return above overall market performance before fees, based on performance data from 8,400 hedge funds.<ref name="Coggan"/> Another estimate is that between January 2000 and December 2009 hedge funds outperformed other investments and were substantially less volatile, with stocks falling an average of 2.62% per year over the decade and hedge funds rising an average of 6.54% per year; this was an unusually volatile period with both the 2001-2002 [[dot-com bubble]] and a [[Great Recession in the United States|recession beginning mid 2007]].<ref name="Lost Decade">{{cite web |url=http://www.hennesseegroup.com/releases/release20100119.html |title=Hedge Funds Out Perform In The "Lost Decade" |publisher=Hennessee Group LLC |date=19 January 2010 |access-date=3 April 2011 |archive-url=https://web.archive.org/web/20110901154411/http://www.hennesseegroup.com/releases/release20100119.html |archive-date=1 September 2011 |url-status=live |df=dmy-all }}</ref> However, more recent data show that hedge fund performance declined and underperformed the market from about 2009 to 2016.<ref>{{Cite news|url=https://www.bloomberg.com/gadfly/articles/2016-03-24/hedge-funds-have-a-performance-problem|title=Just Look at Those Subpar Returns!|last=Kaissar|first=Nir|date=24 March 2016|work=Bloomberg Gadfly|access-date=14 April 2017|archive-url=https://web.archive.org/web/20170415200703/https://www.bloomberg.com/gadfly/articles/2016-03-24/hedge-funds-have-a-performance-problem|archive-date=15 April 2017|url-status=live|df=dmy-all}}</ref>

Hedge funds performance is measured by comparing their returns to an estimate of their risk.<ref name=Bollen>{{cite journal |last1=Bollen |first1=Nicolas P.B. |last2=Whaley |first2=Robert E. |date=April 2009 |title=Hedge Fund Dynamics: Implications |journal=The Journal of Finance |volume=LXIV |issue=2 |pages=985–1035 |url=http://www.afajof.org/afa/forthcoming/4944.pdf |access-date=3 April 2011 |doi=10.1111/j.1540-6261.2009.01455.x |archive-url=https://web.archive.org/web/20120406181032/http://www.afajof.org/afa/forthcoming/4944.pdf |archive-date=6 April 2012 |url-status=dead |df=dmy-all }}</ref> Common measures are the [[Sharpe ratio]],<ref>{{cite book |title=Evaluating hedge fund performance |last=Tran |first=Vinh Q. |year=2006 |publisher=John Wiley & Sons |isbn=978-0-471-68171-7 |page=181}}</ref> [[Treynor ratio|Treynor measure]] and [[Jensen's alpha]].<ref>{{cite book |title=Hedge fund alpha |last=Longo |first=John M.|year=2009 |publisher=World Scientific Publishing |isbn=978-981-283-465-2 |pages=203–204}}</ref> These measures work best when returns follow [[normal distribution]]s without [[autocorrelation]], and these assumptions are often not met in practice.<ref name=CTA22>{{cite book |title=Commodity Trading Advisors: Risk, Performance Analysis, and Selection |last1=Christopherson |first1=Robert |last2=Gregoriou |first2=Greg N. |year=2004 |publisher=John Wiley & Sons |isbn=978-0-471-68194-6 |pages=377–384}}</ref>

New performance measures have been introduced that attempt to address some of theoretical concerns with traditional indicators, including: modified [[Sharpe ratio]]s;<ref name=CTA22/><ref>{{cite book |title=Encyclopedia of alternative investment |last=Gregoriou |first=Greg N. |year=2008 |publisher=Taylor & Francis Inc. |isbn=978-1-4200-6488-9 |page=303}}</ref> the [[Omega ratio]] introduced by Keating and Shadwick in 2002;<ref>{{cite book |title=Hedge fund alpha |last=Longo |first=John M.|year=2009 |publisher=World Scientific Publishing |isbn=978-981-283-465-2 |page=205}}</ref> Alternative Investments Risk Adjusted Performance (AIRAP) published by Sharma in 2004;<ref>{{cite book |title=Hedge Funds: Insights in Performance Measurement, Risk Analysis, and Portfolio Allocation |last=Sharma |first=Milind |year=2005 |publisher=Wiley, John & Sons Incorporated |isbn=978-0-471-73743-8 |pages=403–434}}</ref> and Kappa developed by Kaplan and Knowles in 2004.<ref>{{cite book |title=High-Frequency Trading |last=Aldridge |first=Irene |year=2009 |publisher=Wiley, John & Sons Incorporated |isbn=978-0-470-56376-2 |page=56}}</ref>

===Sector-size effect===
There is a debate over whether [[Alpha (finance)|alpha]] (the manager's skill element in performance) has been diluted by the expansion of the hedge fund industry. Two reasons are given. First, the increase in traded volume may have been reducing the [[Market anomaly|market anomalies]] that are a source of hedge fund performance. Second, the remuneration model is attracting more managers, which may dilute the talent available in the industry.<ref>{{cite book |last=Lack |first=Simon |title=The Hedge Fund Mirage: The Illusion of Big Money and why it's Too Good to be True |url=https://books.google.com/books?id=VLNomI8ahVQC&q=%22a+small+hedge+fund+industry+has+done+better+than+a+large+one%22&pg=PT18 |access-date=6 March 2013 |year=2012 |publisher=John Wiley & Sons |location=New Jersey|isbn=978-1-118-16431-0 |page=7}}</ref><ref>{{cite journal |title=The Right Place for Alternative Betas in Hedge Fund Performance: an Answer to the Capacity Effect Fantasy |last1=Géhin |first1=Walter |last2=Vaissié |first2=Mathieu |url=http://faculty-research.edhec.com/servlet/com.univ.collaboratif.utils.LectureFichiergw?ID_FICHIER=1328885973094 |date=June 2005 |journal=The Journal of Alternative Investments |volume=9 |issue=1 |pages=9–18 |access-date=28 February 2013 |doi=10.3905/jai.2006.640263 |s2cid=154934418 |archive-url=https://web.archive.org/web/20140607002003/http://faculty-research.edhec.com/servlet/com.univ.collaboratif.utils.LectureFichiergw?ID_FICHIER=1328885973094 |archive-date=7 June 2014 |url-status=live |df=dmy-all }}</ref>

===Hedge fund indices===
[[Stock market index|Indices]] play a central and unambiguous role in traditional asset markets, where they are widely accepted as representative of their underlying portfolios. Equity and debt [[index fund]] products provide investable access to most [[developed market]]s in these asset classes.

Hedge fund indices are more problematic. The typical hedge fund is not traded on exchange, will accept investments only at the discretion of the manager, and does not have an obligation to publish returns. Despite these challenges, Non-investable, Investable, and Clone indices have been developed.

====Non-investable indices====
Non-investable indices are indicative in nature and aim to represent the performance of some database of hedge funds using some measure such as mean, median, or weighted mean from a hedge fund database. The databases have diverse selection criteria and methods of construction, and no single database captures all funds. This leads to significant differences in reported performance between different indices.

Although they aim to be representative, non-investable indices suffer from a lengthy and largely unavoidable list of [[Selection bias|biases]]. Funds' participation in a database is voluntary, leading to [[self-selection bias]] because those funds that choose to report may not be typical of funds as a whole. For example, some do not report because of poor results or because they have already reached their target size and do not wish to raise further money.

The short lifetimes of many hedge funds mean that there are many new entrants and many departures each year, which raises the problem of [[Attrition bias|survivorship bias]]. If we examine only funds that have survived to the present, we will overestimate past returns because many of the worst-performing funds have not survived, and the observed association between fund youth and fund performance suggests that this bias may be substantial.

When a fund is added to a database for the first time, all or part of its historical data is recorded ex-post in the database. It is likely that funds only publish their results when they are favorable, so that the average performances displayed by the funds during their incubation period are inflated. This is known as "instant history bias" or "backfill bias".

====Investable indices====
Investable indices are an attempt to reduce these problems by ensuring that the return of the index is available to shareholders. To create an investable index, the index provider selects funds and develops structured products or derivative instruments that deliver the performance of the index. When investors buy these products the index provider makes the investments in the underlying funds, making an investable index similar in some ways to a fund of hedge funds portfolio.

To make the index investable, hedge funds must agree to accept investments on the terms given by the constructor. To make the index liquid, these terms must include provisions for redemptions that some managers may consider too onerous to be acceptable. This means that investable indices do not represent the total universe of hedge funds. Most seriously, they under-represent more successful managers, who typically refuse to accept such investment protocols.

====Hedge fund replication====
The most recent addition to the field approaches the problem in a different manner. Instead of reflecting the performance of actual hedge funds, they take a statistical approach to the analysis of historic hedge fund returns and use this to construct a model of how hedge fund returns respond to the movements of various investable financial assets. This model is then used to construct an investable portfolio of those assets. This makes the index investable, and in principle, they can be as representative as the hedge fund database from which they were constructed. However, these clone indices rely on a statistical modelling process. Such indices have too short a history to state whether this approach will be considered successful.

=== Closures ===
In March 2017, HFR – a hedge fund research data and service provider – reported that there were more hedge-fund closures in 2016 than during the 2009 recession. According to the report, several large public pension funds pulled their investments in hedge funds, because the funds' subpar performance as a group did not merit the high fees they charged.

Despite the hedge fund industry topping $3 trillion for the first time ever in 2016, the number of new hedge funds launched fell short of levels before the [[2008 financial crisis]]. There were 729 hedge fund launches in 2016, fewer than the 784 opened in 2009, and dramatically fewer than the 968 launches in 2015.<ref>{{cite news |url=https://nypost.com/2017/03/17/hedge-funds-close-at-faster-pace-in-2016-than-2009-recession/ |title=Hedge funds close at faster pace in 2016 than 2009 recession|last=English|first=Carleton |date=18 March 2017|website=[[New York Post]] |archive-url=https://web.archive.org/web/20170320225330/http://nypost.com/2017/03/17/hedge-funds-close-at-faster-pace-in-2016-than-2009-recession/|archive-date=20 March 2017|url-status=live|df=dmy-all}}</ref>