Reading 76: Alternative Investments -LOS l, (Part 2)～ Q1 reported, included, databases, successful, class

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1.Only successful, ongoing hedge funds are included in hedge fund databases. The resulting inflation of reported hedge fund performance can be best described as:

A)   asymmetrical returns.

B)   self-selection bias.

C)   smoothed pricing.

D)   survivorship bias.

2.Survivorship bias is acute with hedge fund databases because hedge:

A)   funds are more highly leveraged than other asset classes.

B)   funds experience higher volatility of returns than traditional investments.

C)   funds tend to be invested in illiquid markets.

D)   fund managers often do not have to comply with performance presentation standards.

3.Which of the following statements regarding survivorship bias in hedge funds is TRUE? Survivorship bias tends to:

A)   understate the performance and overstate the volatility of hedge funds.

B)   overstate the performance and understate the volatility of hedge funds.

C)   overstate both the performance and volatility of hedge funds.

D)   understate both the performance and volatility of hedge funds.

cfaedu

1.Only successful, ongoing hedge funds are included in hedge fund databases. The resulting inflation of reported hedge fund performance can be best described as:

A)   asymmetrical returns.

B)   self-selection bias.

C)   smoothed pricing.

D)   survivorship bias.

The correct answer was D)

Asymmetrical returns refers to the option-like return profiles that result from some hedge fund strategies. Self-selection bias reflects the fact that submission of data by fund managers is voluntary, and they tend to submit only impressive results. Smoothed pricing results from assets that trade infrequently, thus lowering perceived (but not actual) volatility. Survivorship bias does result from the fact that only successful hedge funds with ongoing operations are included in databases, thus putting an upward bias on the returns of hedge funds as an asset class.

2.Survivorship bias is acute with hedge fund databases because hedge:

A)   funds are more highly leveraged than other asset classes.

B)   funds experience higher volatility of returns than traditional investments.

C)   funds tend to be invested in illiquid markets.

D)   fund managers often do not have to comply with performance presentation standards.

The correct answer was D)

The main reason behind the survivorship bias problem in hedge fund reporting is that hedge funds are exempt from most SEC regulations, including performance presentation standards. This lack of standards leads to many inconsistencies in reporting that are not present in other asset classes.

3.Which of the following statements regarding survivorship bias in hedge funds is TRUE? Survivorship bias tends to:

A)   understate the performance and overstate the volatility of hedge funds.

B)   overstate the performance and understate the volatility of hedge funds.

C)   overstate both the performance and volatility of hedge funds.

D)   understate both the performance and volatility of hedge funds.

The correct answer was B)

Survivorship bias exists because only the successful hedge funds submit performance data, thus overstating performance when the index is considered to be representative of the entire hedge fund population. Likewise, stable funds tend to succeed, while more volatile funds tend to go out of business, causing the database to tend to understate volatility for hedge funds as an asset class.

Chiufai

helpful,thanks