SSRN-The Persistence of Risk-Adjusted Mutual Fund Performance by Edwin Elton, Martin Gruber, Christopher Blake

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The Persistence of Risk-Adjusted Mutual Fund Performance

EDWIN J. ELTON
New York University - Department of Finance
MARTIN J. GRUBER
New York University - Department of Finance
CHRISTOPHER R. BLAKE
Fordham University - Graduate School of Business Administration

Working Paper Series S-95-13

Abstract:
This paper examines mutual fund predictability for common stock funds, using a sample free of survivorship bias, andmeasures performance using risk-adjusted returns. We reconfirm the hot hands result that high return can predict high return in the short run. Like Hendricks, Patel and Zeckhauser, we find that past performance is predictive of future risk-adjusted performance in both the short run and longer run. Furthermore, when we utilize modern portfolio theory (MPT) techniques to allocate capital among funds, we can construct a portfolio of funds based on prior data that significantly outperforms a rule based on past rank alone and that produces a positive risk-adjusted excess return. In addition, we demonstrate the improvement in performance using MPT by selecting a combination of actively managed portfolios that has the same risk as a portfolio of index funds but has higher mean return. While consistent with past studies, our study finds that expenses account for only part of the differences in performance across funds. We find that there is still predictability even after the major impacts of expenses have been removed. Throughout our study we are able to construct portfolios of funds that have small but statistically significant positive risk-adjusted returns during a period where mutual funds in general had negative risk-adjusted returns.

JEL Classifications: D89

Working Paper Series

Contact Information for EDWIN J. ELTON (Contact Author) Email address for EDWIN J. ELTON New York University - Department of Finance 44 West 4th Street Ste 9-190 New York , NY 10012-1126 United States 212-998-0361 (Phone) 212-995-4233 (Fax)
Contact Information for CHRISTOPHER R. BLAKE Email address for CHRISTOPHER R. BLAKE Fordham University - Graduate School of Business Administration 113 West 60th Street Lowenstein Building New York , NY 10023 United States 212-636-6750 (Phone)
Contact Information for MARTIN J. GRUBER Email address for MARTIN J. GRUBER New York University - Department of Finance 44 West 4th Street Ste 9-190 New York , NY 10012-1126 United States 212-998-0333 (Phone) 212-995-4233 (Fax)

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