Practical Thresholds
Hedge fund strategy indices cannot generate benchmark Bias Ratios because aggregated monthly returns mask individual manager behavior. All else being equal, managers face the difficult pricing options outlined in the introductory remarks in non-synchronous periods, and their choices should average out in aggregate. However, Bias Ratios can be calculated at the manager level and then aggregated to create useful benchmarks.
Strategies that employ illiquid assets can have Bias Ratios with an order of magnitude significantly higher than the Bias Ratios of indices representing the underlying asset class. For example, most equity indices have Bias Ratios falling between 1.0 and 1.5. A sample of equity hedge funds may have Bias Ratios ranging from 0.3 to 3.0 with an average of 1.29 and standard deviation of 0.5. On the other hand, the Lehman Aggregate MBS Index had a Bias Ratio of 2.16, while MBS hedge funds may have Bias Ratios from a respectable 1.7 to an astounding 31.0, with an average of 7.7 and standard deviation of 7.5.
Read more about this topic: Bias Ratio (finance)
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