What is the bias ratio?
The bias ratio is a method of analysing returns on hedge funds or other collective investment vehicles for signs that valuations have been manipulated. It is especially valuable when such vehicles are invested in illiquid assets.
Where have you heard about the bias ratio?
As an investor, you may have come across the bias ratio in financial media and in guides to investment. Your financial adviser may have mentioned it, perhaps in relation to the Bernie Madoff scandal of December 2008, which the bias ratio played a part in uncovering.
What you need to know about the bias ratio.
The bias ratio was developed by Adil Abdulali, a risk manager at the investment firm Protege Partners, in the mid-2000s. It seeks to detect biases when managers are required to state the net asset value of their fund. When such funds are invested in liquid securities, there is little scope for bias as the value will be taken from market prices. But with more illiquid investments the manager can take a more subjective approach. The bias ratio of a fund invested solely in liquid assets such as equities ought to be 1. With illiquid assets, the ratio is likely to be considerably higher.