What does survivorship bias in hedge fund reporting imply?

Survivorship bias in hedge fund reporting arises when only the funds that are still operating—typically those that have performed well—are included in performance reports. This means that funds that have closed or underperformed are often excluded from the data, skewing the overall performance metrics.

In the context of hedge fund reporting, if poorly performing funds stop reporting or are removed from datasets, the remaining sample only represents a subset of funds that have managed to survive, often leading to an exaggeration of average performance. This scenario highlights that the data is biased because it fails to account for the performance of those funds that did not survive—those that may have had poor outcomes and thus stopped reporting their results.

As a result, the conclusion that the database performance is biased due to unreported poor performance reflects the essence of survivorship bias. The data does not encompass all hedge funds equally, leading to misleading insights for investors who may rely on these metrics without full context.