FRM Part I · FRM Exam Part I · Fund Management

Academic studies of hedge fund performance often compare reported alpha with the alpha adjusted for data biases. Which statement best reflects the typical evidence and reasoning?

Reported database returns tend to overstate what investors actually earned. Survivorship bias removes failed funds and backfill bias adds favorable prior history, and both raise the average. Adjusting for them lowers measured alpha, so raw database performance should be treated with caution.

1. AReported database returns tend to overstate what investors earned, because survivorship and backfill biases both inflate averagesCorrect
2. BBiases in databases generally understate returns because poor funds are over-represented
3. CBackfill bias lowers reported alpha since new funds report only losses
4. DSurvivorship bias affects only volatility estimates and leaves mean returns unchanged