Instant History Bias
Categories: Financial Theory
An instant history bias, also aptly known as a backfill bias, is when a fund joins a database or index for the first time in a strategic way that makes the fund look like it’s performing better than it actually is.
A fund manager can choose a strategic time for a fund to join a database or index...that strategic time being when the fund will backfill with the strongest performance, creating an “instant history” within the database or index which is, well, biased.
It’s kind of a form of survivorship bias, which is where you only see a portion of the complete picture, which is misleading, especially if the “hidden” part is very different from the visible part.
Since funds have the option to backfill when joining indexes, fund managers can exploit the possibilities to create inaccurate and inflated performance of their fund. This is often done by hedge funds, so if you’re investing in those, keep a sharp eye out for instant history bias.