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Conference of 2007
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Using survivorship bias-free datasets to rank mutual fund performance introduces a market climate bias that depends on the period during which mutual funds without return data over the full evaluation period existed. We first illustrate the mathematical relationship between different performance measures and fund-specific characteristics according to the Carhart (1993) four-factor model. This shows how these measures are influenced by market climate. This bias tends to create different rankings of mutual funds depending on the measure used to evaluate fund performance. Using a survivorship bias-free sample of US equity mutual funds, we find that non-surviving funds existing in a bull market exhibit above-average Sharpe and Treynor ratios but below-average one-, three-, and four-factor alphas. Non-full-data funds existing a high proportion of their lifetimes in a bear market exhibit below-average Sharpe and Treynor ratios but above-average alphas. Once the performance measures of non-full-data funds are time-period adjusted based on fund-specific characteristics according to the four-factor model, performance rankings become clearly more consistent across the various performance measures.
Abstract
Ranking of equity mutual funds: The bias in using survivorship bias-free datasets
Scholz, Hendrik; Schnusenberg, OliverUsing survivorship bias-free datasets to rank mutual fund performance introduces a market climate bias that depends on the period during which mutual funds without return data over the full evaluation period existed. We first illustrate the mathematical relationship between different performance measures and fund-specific characteristics according to the Carhart (1993) four-factor model. This shows how these measures are influenced by market climate. This bias tends to create different rankings of mutual funds depending on the measure used to evaluate fund performance. Using a survivorship bias-free sample of US equity mutual funds, we find that non-surviving funds existing in a bull market exhibit above-average Sharpe and Treynor ratios but below-average one-, three-, and four-factor alphas. Non-full-data funds existing a high proportion of their lifetimes in a bear market exhibit below-average Sharpe and Treynor ratios but above-average alphas. Once the performance measures of non-full-data funds are time-period adjusted based on fund-specific characteristics according to the four-factor model, performance rankings become clearly more consistent across the various performance measures.