Survivorship Bias and Mutual Fund Performance: Relevance, Significance, and Methodical Differences

This paper is the first to systematically test the significance of survivorship bias using a comprehensive database and to test the significance of the differences of survivorship biases resulting from different methodical approaches. We apply the various methods most commonly used in the literature on a uniform dataset. In addition, we analyze the performance of closed funds as the driver of survivorship bias and the performance of new funds as the driver of incubation bias. Our main findings are: i) Ignoring closed funds leads to a significantly positive survivorship bias. This is in line with previous research. ii) The choice of methods leads to statistically and economically significant differences in survivorship bias estimates. We are able to suggest a bias-minimizing combination of methods if survivorship bias-free data is not available. iii) The performance of closed funds drives survivorship bias since these funds underperform surviving funds years before they are closed. iv) We find evidence for incubation bias in our data but its impact is rather small and clearly depends on the methods applied.