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FRM Part I · FRM Exam Part I · Fund Management

A hedge fund reports in a database that includes only funds above a minimum asset size, and funds often stop reporting when they are about to liquidate, so their final poor returns are never recorded. Which description best fits the omission of those final returns?

This is liquidation bias, and it overstates reported performance. Funds that stop reporting before closing leave out their final, usually poor, returns, so the data that remain look better than the full experience of investors in those funds.

  1. ALiquidation bias, which overstates the reported performanceCorrect
  2. BBackfill bias, which understates the reported performance
  3. CSurvivorship bias that only affects funds that never report
  4. DMulti-period sampling bias, which has no effect on mean returns

Explanation

When funds stop reporting before closing, their last and typically worst returns are missing. The remaining data overstate performance. This is liquidation bias, closely related to survivorship bias, and it does not understate returns.

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