Why Worry About Survivorship Bias?


For actively managed US equity mutual funds over the period from 1991 to 2020, survivorship bias overstates the median fund alpha by 0.60% per year: The median fund alpha is –0.84% per year among surviving funds compared to –1.44% per year among both surviving and non-surviving funds. Analyzing the performance of mutual fund managers is popular among financial researchers for the many insights it provides about markets. However, the usefulness of inference from fund returns depends critically on data quality. Because non-surviving funds tend to have poorer performance than surviving funds, studies that examine only surviving strategies suffer from an upward bias in returns known as “survivorship bias.” Our research suggests that survivorship bias overstates the median fund alpha by roughly 50% compared to the survivorship bias-free median (here, alpha refers to performance after accounting for exposures to known drivers of expected returns). It also nearly doubles the proportion of funds that earn a reliably positive alpha.

Impact of Survivorship Bias on Fund Alpha

Survivorship bias matters for two reasons: Funds are often liquidated or merged, and non-surviving funds tend to perform worse than surviving funds. We quantify the effects of survivorship bias using a sample of actively managed US equity mutual funds from the Morningstar Direct database (see the data appendix for the detailed sample-selection criteria). The sample period is January 1991 to June 2020.1

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