Market Efficiency Wins Again

Skeptics of stock market efficiency are always ready to argue "evidence" that the stock market is grossly inefficient. One piece of evidence that has been used in recent years is the performance of hedge funds. An oft reported statistic is that the average hedge fund return since 1996 was 12.6 percent per year. A recent article highlights research that indicates this claim is incorrect. Overstated hedge funds returns are due to the fact that hedge funds self-report returns. So, if a fund has poor returns, it stops reporting returns. Additionally, when a hedge fund is started, it will often not report returns until it has "something to brag about."  After removing these biases, the researchers found that the average annual hedge fund return since 1996 was only 6.3 percent, half of the reported average!