Double-Adjusted Mutual Fund Performance

Abstract

Mutual fund returns are significantly related to stock characteristics in the cross section after controlling for risk via factor models. We develop a new double-adjusted approach that controls for both factor-model betas and stock characteristics in one performance measure. The new measure substantially affects performance rankings, with a quarter of funds experiencing a change in percentile ranking greater than ten. Double-adjusted performance produces strong evidence of persistence in relative performance. Inference based on the new measure often differs, sometimes dramatically, from that based on traditional performance estimates

Keywords: Manager skill, double-adjusted performance, factor model, stock characteristics, mutual funds

JEL Classification: G11, G23, J24