CFA Level I · CFA Level I Exam · Hedge Funds
A hedge fund database adds a newly launched fund and also incorporates the fund's strong returns from before it joined the database. The resulting upward distortion in database performance is best described as:
This is backfill bias. When a fund joins a database and its earlier, usually strong, track record is added, historical index returns become inflated because managers tend to start reporting only after good performance. It differs from survivorship bias, which arises from removal of failed funds.
- Aliquidation bias.
- Bsurvivorship bias.
- Cbackfill bias.Correct
Explanation
Managers typically choose to report after a period of good results, and the database then includes that prior history. This backfill (instant history) bias inflates the average returns. Survivorship bias relates to dropped funds.
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