Informationless Investing and Hedge Fund Performance Measurement Bias

Abstract

Asset managers have the ability to engage in essentially “informationless” investment strategies that can produce the appearance of return enhancement without necessarily providing any value to an investor. Statistical estimates of risk, return, and association therefore frequently mischaracterize investment returns. These mischaracterizations, the author argues, have significant negative implications for both the asset allocation process and the validity of related academic research. He presents three specific informationless investment strategies, which he believes are endemic to the hedge fund industry, and assesses their consequences with respect to performance measurement and asset allocation.