Mutual Fund's R2 as Predictor of Performance

Forthcoming, Review of Financial Studies

49 Pages Posted: 24 Dec 2008 Last revised: 10 Nov 2012

Yakov Amihud

New York University - Stern School of Business

Ruslan Goyenko

McGill University - Desautels Faculty of Management

Date Written: October 23, 2012

Abstract

We propose that fund performance can be predicted by its R2, obtained from a regression of its returns on a multi-factor benchmark model. Lower R2 indicates greater selectivity and it significantly predicts better performance. Stock funds sorted into lowest-quintile lagged R2 and highest-quintile lagged alpha produce significant annual alpha of 3.8%. Across funds, R2 is positively associated with fund size and negatively associated with its expenses and manager’s tenure.

Suggested Citation

Amihud, Yakov and Goyenko, Ruslan, Mutual Fund's R2 as Predictor of Performance (October 23, 2012). Forthcoming, Review of Financial Studies. Available at SSRN: https://ssrn.com/abstract=1319786 or http://dx.doi.org/10.2139/ssrn.1319786

Yakov Amihud

New York University - Stern School of Business ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
212-998-0720 (Phone)
212-995-4233 (Fax)

Ruslan Goyenko (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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