So i understand what survivorship bias is but have trouble placing logic to the below: “The degree of survivorship bias varies among the hedge-fund strategies. It is probably low for event-driven strategies and higher for hedged-equity strategies” For the below question, I choose A but the answer was C. It is a simple question straight out of the books, but without understanding the reasoning …it is difficult to commit to memory… anyone please explain With respect to hedge fund indices, survivorship bias: A) can be as high as 1.5% to 3% and is probably high for event-driven strategies and lower for hedged-equity strategies. B) can be as high as 3% to 5% and is probably high for event-driven strategies and lower for hedged-equity strategies. C) can be as high as 1.5% to 3% and is probably low for event-driven strategies and higher for hedged-equity strategies.
I guess event driven strategies are a lil more predictable(to get it right) compared to hedged equity strategies. So more hedged equity funds disappear (from reporting world due to bad performance) compared to event driven funds. I am purely guessing. Some one like maratikus will give a much better answer.
my 2 cents: hedged equity strategy has the low entry barrier and more ‘bad’ PM get into the investment manager crowd. it causes more low performance outlier which will not survive.
Thanks GSG and itfaster
I presumed this was a mistake. Hedged equity would surely have the lower probability of v. heavy losses, by virtue of its definition. i.e. you would have thought basis risk in hedged equity starategies is likely to be smaller than the outight variability of returns on, for example, global-macro strategies.
Bumping. I just read this section and I think I have a handle on this now. Event driven strategies are short-term in nature and include stuff like merger arbitrage, which is a relatively low risk strategy. Equity hedge includes ALL strategies that use both long and short positions (not just market neutral). So you could be net short or net long. Throw in some leverage here and it is pretty easy to see why funds in this category blow up more than event driven.
I would think that the reason that survivorship bias could be higher in Equity L/S is because the return profile is typically bigger (hence the larger bias?). Event strategies are typically less directional and more alpha-focused (can have relatively smaller returns but be uncorrelated with markets). Was this a CFAI question or a Schweser question? I used to work in the HF industry and think that a broad generalization like this could be argued easily (and the 3% seems kind of arbitrary too). Are you guys memorizing numbers like this? 3%, 1.5%, 5%?
this was from the Schweser Qbank
since they are talking about hedge fund strategies… so the routine business which is equity hedging like the plain hedge funds which are larger in number of the total no of hedge funds are more likely to have the bias… on the contrary… event driven strategies funds are very specialized and less in number then the general hedge funds… hence i guess the explaination hope it helps