FRM Part I · FRM Exam Part I · Fund Management

A researcher builds a hedge fund performance database from a commercial vendor in which funds report voluntarily. Funds that liquidate after poor results stop reporting and are removed from the historical data. Which bias does this most directly create, and in which direction does it distort average reported returns?

This is survivorship bias, and it overstates average returns. Funds that fail and stop reporting are dropped from the database, leaving only successful funds, so the historical average looks better than the true experience of all funds that were launched.

1. ASurvivorship bias, overstating average returnsCorrect
2. BSurvivorship bias, understating average returns
3. CBackfill bias, understating average returns
4. DSelection bias from market timing, understating average returns