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Mutual Fund Performance Evaluation with Active Peer Benchmarks

54 Pages Posted: 19 Feb 2009 Last revised: 13 Aug 2013

David L. Hunter

University of Hawaii at Manoa - Shidler College of Business

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics; Centre for Economic Policy Research (CEPR)

Shmuel Kandel (deceased)

Deceased

Russ Wermers

University of Maryland - Robert H. Smith School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 11, 2013

Abstract

We propose a simple approach to account for commonalities in mutual fund strategies that relies solely on information on fund returns and investment objectives. Our approach augments commonly used factor models with an additional benchmark that represents an equal investment in all same-category funds, which we call an "Active Peer Benchmark," or APB. We find that APBs substantially reduce the average time-series correlation of residuals between individual funds within a group when added to a four-factor equity model (or to a seven-factor xed-income model). Importantly, adding this APB signifi cantly improves the selection of funds with future outperformance.

Suggested Citation

Hunter, David L. and Kandel , Eugene and Kandel (deceased), Shmuel and Wermers, Russ, Mutual Fund Performance Evaluation with Active Peer Benchmarks (August 11, 2013). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1344140 or http://dx.doi.org/10.2139/ssrn.1344140

David Hunter

University of Hawaii at Manoa - Shidler College of Business ( email )

Department of Financial Economics and Institutions
2404 Maile Way, E-601K
Honolulu, HI 96822
United States
808-956-7276 (Phone)
808-956-9887 (Fax)

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics ( email )

School of Business
Mount Scopus
Jerusalem 91905
Israel
+972 2 588 3137 (Phone)
+972 2 581 6071 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Russell Wermers (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)

HOME PAGE: http://www.rhsmith.umd.edu/finance/rwermers/

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