Incubation

A A A

DEFINITION

A trial process in which a fund company operates a number of funds privately with its own capital or employee capital, and only opens the top performing funds to the public. The higher performing funds that survive the incubation period are used by the fund company to generate business. The funds with unattractive performance, which would be more difficult to market, are liquidated.

See also "incubated fund."

INVESTOPEDIA EXPLAINS

While there is nothing illegal about this practice, some consider it to be unethical because it can overstate the investing performance of the fund company, creating what is known as incubation bias.

For example, suppose that a fund company starts three funds that earn returns of -5%, 2%, and 20%, respectively, over a one-year period. If the fund company only opens the 20% fund to the public and does not disclose the other performances, a bias is created because the average performance of the three funds is actually 5.7%.


RELATED TERMS
  1. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected from many ...
  2. Survivorship Bias

    The tendency for mutual funds with poor performance to be dropped by mutual ...
  3. Incubated Fund

    A fund that is offered privately when it is first created. Investors of this ...
  4. Hedge Fund

    An aggressively managed portfolio of investments that uses advanced investment ...
  5. Manager Universe (Benchmark)

    A peer group of investment managers who have the same investment style. Manager ...
  6. Bear Fund

    A mutual fund designed to provide higher returns when the market declines in ...
  7. Ulcer Index - UI

    An indicator developed by Peter G. Martin and Byron B. McCann that is used to ...
  8. Subprime Meltdown

    The sharp increase in high-risk mortgages that went into default beginning in ...
  9. Event Risk

    1. The risk due to unforeseen events partaken by or associated with a company. ...
  10. Investment Company Act Of 1940

    Created in 1940 through an act of Congress, this piece of legislation clearly ...
Related Articles
  1. Watch Out For The Mutual Fund Metamorphosis
    Mutual Funds & ETFs

    Watch Out For The Mutual Fund Metamorphosis

  2. Published Mutual Fund Returns Not Always ...
    Mutual Funds & ETFs

    Published Mutual Fund Returns Not Always ...

  3. A Brief History Of The Hedge Fund
    Options & Futures

    A Brief History Of The Hedge Fund

  4. A Brief History Of The Mutual Fund
    Retirement

    A Brief History Of The Mutual Fund

  5. Understanding Leveraged Buyouts
    Fundamental Analysis

    Understanding Leveraged Buyouts

  6. The Best Morningstar Tools For Analysts
    Mutual Funds & ETFs

    The Best Morningstar Tools For Analysts

  7. How The Sarbanes-Oxley Era Affected ...
    Fundamental Analysis

    How The Sarbanes-Oxley Era Affected ...

  8. Where's The Market Headed Now?
    Fundamental Analysis

    Where's The Market Headed Now?

  9. Does Higher Risk Really Lead To Higher ...
    Active Trading

    Does Higher Risk Really Lead To Higher ...

  10. Invest Like Madoff - Without The Jail ...
    Options & Futures

    Invest Like Madoff - Without The Jail ...

comments powered by Disqus
Hot Definitions
  1. Genuine Progress Indicator - GPI

    A metric used to measure the economic growth of a country. It is often considered as a replacement to the more well known gross domestic product (GDP) economic indicator. The GPI indicator takes everything the GDP uses into account, but also adds other figures that represent the cost of the negative effects related to economic activity (such as the cost of crime, cost of ozone depletion and cost of resource depletion, among others).
  2. Accelerated Share Repurchase - ASR

    A specific method by which corporations can repurchase outstanding shares of their stock. The accelerated share repurchase (ASR) is usually accomplished by the corporation purchasing shares of its stock from an investment bank. The investment bank borrows the shares from clients or share lenders and sells them to the company.
  3. Microeconomic Pricing Model

    A model of the way prices are set within a market for a given good. According to this model, prices are set based on the balance of supply and demand in the market. In general, profit incentives are said to resemble an "invisible hand" that guides competing participants to an equilibrium price. The demand curve in this model is determined by consumers attempting to maximize their utility, given their budget.
  4. Centralized Market

    A financial market structure that consists of having all orders routed to one central exchange with no other competing market. The quoted prices of the various securities listed on the exchange represent the only price that is available to investors seeking to buy or sell the specific asset.
  5. Balanced Investment Strategy

    A portfolio allocation and management method aimed at balancing risk and return. Such portfolios are generally divided equally between equities and fixed-income securities.
  6. Negative Carry

    A situation in which the cost of holding a security exceeds the yield earned. A negative carry situation is typically undesirable because it means the investor is losing money. An investor might, however, achieve a positive after-tax yield on a negative carry trade if the investment comes with tax advantages, as might be the case with a bond whose interest payments were nontaxable.
Trading Center