Ways to remedy the overstated performance of non-investable hedge fund indexes

Overstated indexes

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The biases that inflate the performance of hedge funds have been well documented in the financial literature. Survivorship bias, which results from the ex post exclusion of unsuccessful funds from databases, is clearly one of the greatest causes of grossly overstated performance.

Considering the returns of surviving funds alone leads to a strong upward bias, according to recent studies (up to 442 basis points (bp) as demonstrated by Malkiel and Saha [2005]).

Backfill bias or instant history bias,