Managers’ Selection: Survivors Always Look Better, Whether They Are Skilled or Not

13 Pages Posted: 30 Apr 2012  

Dominic Clermont

Clermont Alpha, Montreal, QC, Canada

Date Written: February 7, 2012

Abstract

Survivorship bias is present and part of our due diligence process. Whether a manager’s performance database is “free of survivorship bias” or not, the typical use of the database by investors and consultants induce such effect and may lead them to improper conclusions and decisions. The impact of survivorship bias is much greater for low-skilled managers making it virtually impossible to distinguish between skilled and non-skilled “surviving” managers based solely on performance. Survivorship bias also has a much greater impact on high risk investment strategies, something to keep in mind when considering highly concentrated portfolios. Finally, survivorship bias may induce positive correlation between value added and active risk, even when there is no correlation (i.e. for non-skilled managers).

Keywords: Managers' selection, Survivorship bias, manager's performance database, Information Ratio, Investment skill, Backfill bias, Instant history bias, Information coefficient, IR, IC

JEL Classification: G11, G14

Suggested Citation

Clermont, Dominic, Managers’ Selection: Survivors Always Look Better, Whether They Are Skilled or Not (February 7, 2012). Available at SSRN: https://ssrn.com/abstract=2048140 or http://dx.doi.org/10.2139/ssrn.2048140

Dominic Clermont (Contact Author)

Clermont Alpha, Montreal, QC, Canada ( email )

Montreal, QC
Canada

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