Does survivorship bias cut both ways?(Managed Money Review)

One of the major criticisms of the hedge fund industry is that the performance of hedge funds are overstated because many of the databases that report hedge fund performance fail to account for survivorship bias. Survivorship bias is a result of poor performing managers no longer reporting data, skewing the indexes higher.

The research paper, "Sources of Hedge Fund Returns" produced by Yale School of Management Professor Roger Ibbotson and Peng Chen, managing director and CIO of Ibbotson Associates Inc. estimates that survivorship bias skewed hedge fund returns in their 10-year study higher by 2.74%.

The paper also claimed that backfill bias accounted for 4.84% of returns. The paper, which will be presented at an industry forum in April, states that backfill bias occurs when hedge funds include previously unreported performance to data collectors when they first start reporting their returns. It claims that backfill data provides an upward bias because, "typically only favorable early returns are reported."

Many in the hedge fund industry argue that survivorship bias cuts both ways because not all funds that stop reporting their performance fail. They argue that many successful hedge funds, when closed to new investments, stop reporting performance and that this positive performance also is taken out of the numbers. Charles Gradante, managing …