False Discoveries: Winners and Losers in Mutual Fund Performance

36 Pages Posted: 15 Feb 2008

See all articles by Keith Cuthbertson

Keith Cuthbertson

City University London - Sir John Cass Business School

Dirk Nitzsche

City University London - Sir John Cass Business School

Niall O'Sullivan

University College Cork

Date Written: January 2008

Abstract

We use a multiple hypothesis testing framework to estimate the false discovery rate (FDR) amongst UK equity mutual funds. For all funds, we find a relatively high FDR for the best funds of 67% (at a 10% significance level), which indicates that only around 2% of all funds truly outperform their benchmarks. For the worst funds the FDR (at a 10% significance level), is relatively small at 15.9% which results in 20% of funds which truly underperform their benchmarks. For different investment styles, this pattern of very few genuine winner funds is repeated for all companies, small companies and equity income funds. However, forming portfolios of funds based on a set of funds for which the FDR is relatively low, produces positive alphas.

Keywords: Mutual fund performance, false discovery rate

JEL Classification: C15, G11, C14

Suggested Citation

Cuthbertson, Keith and Nitzsche, Dirk and O'Sullivan, Niall, False Discoveries: Winners and Losers in Mutual Fund Performance (January 2008). Available at SSRN: https://ssrn.com/abstract=1093624 or http://dx.doi.org/10.2139/ssrn.1093624

Keith Cuthbertson (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Dirk Nitzsche

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Niall O'Sullivan

University College Cork ( email )

Department of Economics
University College Cork
Cork, n/a
Ireland

Register to save articles to
your library

Register

Paper statistics

Downloads
559
Abstract Views
2,707
rank
48,128
PlumX Metrics