Dicing with the Market: Randomized Procedures for Evaluation of Mutual Funds

Abstract

A statistically correct procedure for evaluating management skill in the mutual fund industry is described. The approach is based on random and semi-random portfolios and is completely data-driven, allowing reference to a specific benchmark or to peer-groups to be avoided. Rather, it produces a new benchmark, which represents the minimum level of performance that skilled management should reach. An application to some Italian equity funds is also given.