http://www.savantcapital.com/sbiasstudy/sbiasstudy.pdf Executive Summary The mutual fund industry systematically and significantly overstates fund performance in a way that falsely makes actively managed mutual funds occasionally look competitive with indexes. When the little-understood âsurvivor biasâ factor is taken into account, actively managed mutual funds in all nine of the Morningstar Principia® âstyle boxesâ lagged their related indexes from 1995-2004. In all but one of the 42 narrower Morningstar fund categories, the survivor bias effect worked to inflate fund returns. The analysis shows that the purging of the weakest funds from the Morningstar database boosted apparent returns on average by 1.6 percent per year over the 10-year period. âSurvivor biasâ is a kind of grade inflation for mutual funds that occurs when the funds with the worst performance are made to disappear from the database while strong performers move forward. The result: skewed performance numbers that make the remaining active managers look better since poor performers vanish before they can drag down the overall performance numbers for the indexes. Very few investors know about survivor bias, but it should be a major concern. For example, over the 10-year period studied, the Mid Blend category returned a whopping cumulative 72 percent less than Morningstar data would suggest. The Corporate High Quality Fund category demonstrated the least survivor bias with 0.4% cumulative return difference. The largest evidence of survivor bias exists in the Aggressive Growth Fund category at 116%.
Not only that... Companies start up 10 mutual funds and then shut/merge the 5 worst performers... Leaving them with only outperforming funds. And in the offshore, unregulated world of hedge funds... Almost any form of market/fund manipulation is practiced. An oversimplified example... assuming fee 2% of assets and 20% of profits: Start Fund A with $10 million. Start Fund B with $10 million. Artfully transfer 50% of assets from B to A over 12 months. Fund A now $15 million... 50% return Fund B now $5 million... -50% return. Manager get 200K + 1000K fees from Fund A. Manager get about 150K fees from Fund B... Probably charge the "investors" a big fee for early withdrawal... Then shut down Fund B. These guys now have one fund that's up 50%... And have collected > 1350K in fees... Just by transferring assets between 2 funds. This happens all the time. The people doing it are probably also running a "Hedge Fund Rating" site... And heavily promoting Fund A. Caveat Emptor. rm+
I can't believe you have to ask... After Enron and Refco on US soil. I'm sure there are 100 artful ways. The most basic way is to trade something fairly illiquid... Like the Units of another Hedge Fund or Fund of Funds... So you are both bid/ask... And you are effectively transfering the big spread from one account to the other. You can create endless entities like LPs or offshore hedge funds... And manufacture custom securities that can do whatever job is required. Remember... This is "regulated" by Gibraltar or some Indian Reservation or not at all. And with the non-disclosure agreements the "investor" signed in his greed to get 50% return... He is not entiltled to know exactly what is in the fund anyway. If Jim Rogers can lose $160 million via Refco... Just imagine the trouble an unsophisticated, drugged up rich kid can get himself into. rm+