Question

What is 'look-ahead bias' in mutual fund performance analysis?

Accepted Answer

Using information that was not available at the time of the investment decision to evaluate past performance — creates illusion of predictability — Look-ahead bias occurs when performance analysis uses information that was not available at the time of the investment decision. For example, selecting funds based on their full 10-year track record when only 3 years were available at the investment decision time. This makes strategies appear more predictable than they actually were — a common flaw in backtested investment strategies.