Do hedge funds covered by the news media underperform “hidden gems?” In their March 2010 paper entitled “Does Recognition Explain The Media-Coverage Discount? Contrary Evidence From Hedge Funds”, Gideon Ozik and Ronnie Sadka examine the effects of media coverage on future hedge fund performance. Using results of 80,000 monthly searches of the Google News archive and monthly return data for 978 hedge funds spanning 1999-2008, they conclude that:
- Media coverage relates positively to past coverage, fund size and perhaps fund fee level and negatively to past fund returns. A fund covered by the media one month has an 80% of being covered next month.
- Hedge funds with media coverage the previous month (at least one mention) underperform those with no coverage by an average -0.3% over the next month. This underperformance is more pronounced among funds at the high and low extremes of past performance (-0.47%) and among small funds (-0.43%).
- Underperformance of covered funds persists for over a year after coverage (see the chart below).
- Media coverage relates negatively to fund flow, but this effect is not the cause of subsequent underperformance.
- The media coverage effect on future returns exists only for North American hedge funds and is strongest during November-February.
The following chart, extracted from the paper, tracks the average performance difference over a 24-month period between hedge funds with media coverage (at least one news item) and hedge funds with no media coverage during the past month. The sample consists of 427 North American long-short equity hedge funds active during 1999-2008. Results show that the underperformance of covered funds is persistent, remaining significant for about 18 months.
In summary, evidence indicates that hedge fund investors should lean toward low-profile funds.
