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FRM Part II · FRM Exam Part II · Performing Due Diligence on Specific Managers and Funds

A due diligence analyst is evaluating whether a manager's strong track record reflects skill. Which finding would most strongly raise concern about survivorship or backfill bias in the manager's presented composite?

A track record that begins before the official launch date and was added after marketing started suggests backfill bias. Historical returns of selectively incubated or successful products inflate apparent skill, whereas including closed funds, net-of-fee reporting and disclosing losses all improve the reliability of the record.

  1. AThe composite includes returns from funds that were later closed
  2. BThe track record starts well before the fund's official launch date, and was added after the manager began marketingCorrect
  3. CThe returns are reported net of fees
  4. DThe manager discloses periods of underperformance

Explanation

Backfill (instant history) bias arises when historical returns are added after a strong period, typically from incubated or selected products, inflating apparent performance. Including closed funds reduces survivorship bias, and net reporting and disclosing losses are good practice.

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