What Is Fast History Bias?
Fast history bias, incessantly known as “backfill bias,” is a phenomenon during which inconsistent reporting practices can unduly inflate the obvious potency of a hedge fund.
This inaccuracy stems from the fact that hedge fund managers can elect whether or not or now not and when to report their results to most of the people. Because of this, managers regularly lengthen reporting their potency until they generate a observe record of sure results. In doing so, they effectively hide the years all over which they performed poorly.
Fast history is a carefully related concept to survivorship bias, which further undermines the accuracy of hedge fund potency statistics.
Key Takeaways
- Fast history bias is a phenomenon leading to inflated potency statistics.
- It is specifically prevalent inside the hedge fund industry and is a related concept to survivorship bias.
- Fast history bias and survivorship bias from time to time interact to further undermine the reliability of potency measures.
Working out Fast History Bias
Fast history bias is especially pervasive among hedge funds, because of the frivolously regulated nature of the hedge fund industry. Although patrons can theoretically research hedge fund potency statistics in databases, such for the reason that Lipper Hedge Fund Database, the reliability of this knowledge cannot be taken as a right. It’s because the potency figures revealed in such databases were regularly submitted months or even years after they took place, thereby giving the hedge fund manager the ability to increase or cancel e-newsletter apart from their investment results are sure.
An additional phenomenon, survivorship bias, further undermines the reliability of hedge fund potency statistics. In line with this bias, databases in most cases generally tend to overstate investment potency because of they fail to take into accout the investment funds which failed and thereby disappeared from the database. Similarly, benchmarks and stock indices too may give inflated results by means of ignoring the adversarial return associated with companies which went bankrupt and due to this fact ceased being built-in inside the index.
In observe, fast history bias and survivorship bias regularly art work in tandem. As an example, as an alternative of launching a brand spanking new $5 million buck long-short fund, a hedge fund manager would possibly unencumber two $2.5 million buck long-short funds with different holdings or selection strategies. The manager would possibly then sit up for two or 3 years, most efficient publishing the results of the fund that is most successful.
Precise-International Example of Fast History Bias
In observe, fast history bias affects funds and their managers in moderately other ways. By the use of delaying the e-newsletter of earlier years’ potency until a positive observe record is done, funds can position themselves to attract further capital from new patrons. Ultimately, however, the former results do wish to be disclosed, even supposing the timing of their e-newsletter is at the back of agenda.
For hedge fund managers, however, there are even upper possible choices to selectively inflate returns. After all, a manager has the collection of selecting whether or not or now not or not to put up the results of a fund altogether, almost certainly hiding the potency of a failed fund perpetually. This is clearly an advantage for a fund manager and may well be used to turn a middling manager proper into a star by means of most efficient showing the successful funds.
To help struggle this perverse incentive, hedge fund databases have begun to limit the extent to which hedge fund managers can backfill their results—and a couple of have prohibited backfilling altogether. However despite the ones duties, the instant history and survivorship biases continue to impact the hedge fund industry’s potency statistics.
