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a??Rethinking Survivorship Biasa?? Paper Finds Current Methodologies Distort Assessment of Active Managersa?? Skill

WASHINGTON, July 30, 2020 (GLOBE NEWSWIRE) -- Survivorship bias adjustments introduce biases of their own and can distort the assessment of manager skill, concludes a new white paper, Rethinking Survivorship Bias in Active/Passive Comparisons, from the Investment Adviser Associationa??s Active Managers Council (AMC). The study illustrates the limitations of survivorship bias adjustments, when used to assess active manager skill and suggests investors reconsider their methodologies to achieve a more accurate assessment of that skill.
Adjusting for survivorship bias has been standard practice in the evaluation of fund performance for the past 30 years. These adjustments aim to reduce the risk that average performance of both mutual funds and hedge funds is overstated because the returns of now defunct a?? but likely underperforming a?? funds have been excluded from the calculation. However, in recent years, researchers have pointed out that survivorship bias adjustments may go too far in the other direction and result in an assessment of manager skill that is too negative.A central insight of the analysis is that the survivorship of passive funds is not significantly different from the survivorship of active funds. This data calls into question the assumption that active funds are closed solely because of a lack of manager skill.a??As the paper demonstrates, survivorship bias adjustments can present a distorted view of active manager skill, yet they are routinely used in broad comparisons of active managers against passive benchmarks such as the Morningstar Active/Passive Barometer or the SPIVA scorecards,a?? noted IAA President and CEO, Karen Barr. a??Investors need to be aware of the limitations of these adjustments in order to make an accurate assessment of actively managed funds.a??To review the paper,A Rethinking Survivorship Bias in Active/Passive Comparisons, or learn more about active management, please visitA www.activemanagers.com.
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