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Measuring the Quality of Hedge Fund Data
Jan 1, 2010
This paper discusses and investigates the quality of hedge fund databases. The accuracy of hedge fund return data is taken for granted in most empirical studies. We show however that hedge fund return time series often exhibit peculiar and most likely “man-made” patterns, which are worth to be recognized. We develop a statistical testing methodology which can detect these patterns. Based on these tests, we devise a data quality score for rating hedge funds and, more generally, hedge fund databases. In an empirical study we show how this data quality score can be used when exploring a hedge fund database. Thereby we can confirm many of the insights by (Liang 2003) concerning the quality of hedge fund return data and made by different means. In a last step we try to estimate the impact of imperfect data on performance measurement by defining a “data quality bias”. The main goals of this paper are to increase the awareness for the practical limitations of hedge fund data and to suggest a tool for the quantification of financial data quality.
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