FRM Part I · FRM Exam Part I · Fund Management
A hedge fund joins a database in January 2022 and immediately submits monthly returns going back to January 2019, when it started trading. The fund's early returns were strong, which motivated it to start reporting. What is the effect of including these earlier returns in the database?
This is backfill, or instant history, bias, and it overstates performance. Funds usually start reporting after a good run and then add earlier returns, so the added history is disproportionately favorable and inflates the average return shown in the database.
- ABackfill (instant history) bias, which overstates the fund's historical performanceCorrect
- BSurvivorship bias, which understates the fund's volatility
- CLiquidation bias, which overstates the fund's fees
- DData-snooping bias, which understates the fund's alpha
Explanation
Funds tend to begin reporting after good performance and then add their prior history, so the added returns are likely favorable. This is backfill or instant history bias and biases the performance upward. Survivorship concerns deleted funds, not added history.
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