What does self-selection bias refer to in hedge funds reporting?

Self-selection bias in hedge fund reporting occurs when only certain funds choose to report their performance, typically those that have performed well. This phenomenon can create a misleading picture of the overall performance of the hedge fund industry, as it skews the data towards more successful funds while neglecting those that may have underperformed or lost money.

The reasoning behind this lies in the motivation of hedge fund managers. Funds that have delivered better returns are more inclined to publicize their results to attract new investors, enhance their reputation, and secure additional capital. Conversely, funds that struggle or post negative returns often do not report their performance, either due to a desire to avoid unfavorable comparisons or to protect their existing investor base from panic reactions.

In this context, the other options fall short. The idea that only average-performing hedge funds report performance overlooks the tendency of funds to promote favorable outcomes, while stating all hedge funds report their performance equally is inaccurate given the variability in reporting practices and motivations. Lastly, the notion that performance reporting is mandatory for all hedge funds does not reflect the reality of the industry, where no such requirement exists for many funds.

Thus, the concept of self-selection bias is rooted in the behavior of hedge funds as they decide whether to disclose their performance based on the