Reverse Survivorship Bias



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    • Juhani Linnainmaa is at University of Chicago Booth School of Business. I thank Alan Bester, John Cochrane, Phil English, Gene Fama, Andrea Frazzini, Bobbie Goettler, Mark Grinblatt, John Heaton, Markku Kaustia, Bryan Kelly, Matti Keloharju, Ralph Koijen, Annette Larson (Morningstar), Robin Lumsdaine, Toby Moskowitz, Robert Novy-Marx, Ľuboš Pástor, Antti Petäjistö, Alexi Savov, Clemens Sialm (NBER discussant), Rob Stambaugh, Matt Taddy, Luke Taylor, Pietro Veronesi, Z. Jay Wang (WFA discussant), and Russ Wermers for helpful discussions. I also thank seminar and conference participants at the University of Chicago, the Norwegian School of Economics and Business Administration (Bergen), American University, BI Norwegian School of Management (Oslo), Copenhagen Business School, Aalto University (Helsinki), the University of Texas at Austin, the University of Illinois at Chicago, the University of Missouri, the NBER Asset Pricing working group conference (Winter 2010), and the 2010 Western Finance Association meetings for comments on earlier drafts. Finally, I am especially grateful for the comments of an anonymous referee, an Associate Editor, and the Editor, Campbell Harvey.


Mutual funds often disappear following poor performance. When this poor performance is partly attributable to negative idiosyncratic shocks, funds' estimated alphas understate their true alphas. This paper estimates a structural model to correct for this bias. Although most funds still have negative alphas, they are not nearly as low as those suggested by the fund-by-fund regressions. Approximately 12% of funds have net four-factor model alphas greater than 2% per year. All studies that run fund-by-fund regressions to draw inferences about the prevalence of skill among mutual fund managers are subject to reverse survivorship bias.