Backfill bias

Backfill bias, also called instant history bias, is closely related to survivorship bias and self-selection bias, and similarly distorts indices. It tends to have a larger effect when it does occur, but in only affects indices that include the past performance of new constituents in their calculations — these are usually hedge fund indices.

The problem is usually restricted to hedge fund indices. This is exacerbated by the lack of disclosure in the industry (compared to listed securities or most types of collective investment vehicle). This means that only those funds that choose to report results to the compilers of an index are included in it. This self selection enables backfill bias in addition to the inevitable survivorship bias.

Studies suggest that backfill bias adds about 4% or more to hedge fund returns, with survivorship bias adding nearly another 3%. This is sufficient to account for most of the apparent alpha generated by hedge funds. Once fees are deducted, this seems to make hedge funds an unpromising investment.

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