Survivorship bias distorts hedge funds performance data

An old chestnut among critics of mutual funds (mutual fund news) is survivorship bias, an old but true criticism. The fact is that poorly performing funds are merged in with other funds or liquidated, which means the fund's performance numbers stop being reported.

Bloomberg notes that three academics have found that the same phenomenon holds for hedge funds (hedge fund news). A "hidden survivorship bias" exists because "funds in their last 12 months of existence are left out of the data," the "gap in returns between these failing funds and others averaged 0.54 percent a month, or about 6 percent annually, for 1994 through the first quarter of 2009." The researchers recommend "standard reporting procedures, including random audits" to increase the accuracy of data on their performance.  

For more:
- here's the Bloomberg article