FRM Part II · FRM Exam Part II · Hedge Fund Investment Strategies
A fund of funds allocator notices that a hedge fund database includes managers who, upon joining, were allowed to submit their prior track records, and only managers with strong histories chose to join. Which bias is this, and what is its effect?
This is instant history, or backfill, bias. Managers who join a database after good results add their earlier favorable returns, so the database's historical performance is overstated compared with what an investor could have actually earned in real time.
- ASurvivorship bias, understating risk
- BInstant history (backfill) bias, overstating historical returnsCorrect
- CLook-ahead bias, understating returns
- DStale pricing bias, overstating correlations
Explanation
Managers typically begin reporting after good performance and then backfill earlier returns, so the added history is skewed to the favorable. This inflates the database's historical average return. Survivorship bias concerns removal of defunct funds, not added history.
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