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FRM Part I · FRM Exam Part I · Fund Management

Which statement best describes the empirical evidence on hedge fund performance after adjusting for the biases commonly found in hedge fund databases?

Bias-adjusted returns are typically lower than raw database returns. Survivorship and backfill biases inflate reported averages, so correcting for them reduces measured performance, meaning unadjusted data overstates the value that hedge funds add for investors.

  1. AReported alpha is generally unchanged because biases offset one another exactly
  2. BBias-adjusted returns are typically lower than raw database returns, so unadjusted data overstates the value added by hedge fundsCorrect
  3. CBias-adjusted returns are typically higher because of liquidation bias
  4. DBiases affect only volatility estimates and never average returns

Explanation

Survivorship and backfill biases push reported returns up, so correcting for them typically lowers estimated performance. Biases do not offset exactly, and they affect mean returns as well as risk estimates.

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