A bias (distortion) that occurs if the database of hedge funds only includes information on surviving funds, i.e., those that continue to operate and report results to the database vendor. The compiled data series reflects only funds that have survived to the end of a given period. This occurrence incorrectly impacts the process of measuring the performance of a hedge fund (or generally a portfolio). It is determined as the difference in return in funds which are defunct or no more in existence and such which survived. It can be expressed as follows:

Survivorship bias = R_S – R_A

Where: R_S is the average annual return of surviving fund and R_A is the average annual return of all sampled funds.

Survivorship bias raises a major concern for investors in hedge funds. If it is significant, then the historical return record of the average surviving fund is higher than the average return of all funds over the sampled period.