False Discoveries in UK Mutual Fund Performance

20 Pages Posted: 19 May 2012

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: June 2012

Abstract

We use a multiple hypothesis testing framework to estimate the false discovery rate (FDR) amongst UK equity mutual funds. Using all funds, we find a relatively high FDR for the best funds of 32.8% (at a 5% significance level), which implies that only around 3.7% of all funds truly outperform their benchmarks. For the worst funds the FDR is relatively small at 7.6% which results in 22% 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. Forming portfolios of funds recursively for which the FDR is controlled at a ‘acceptable’ value, produces no performance persistence for positive alpha funds and weak evidence of persistence for negative alpha funds.

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 in UK Mutual Fund Performance (June 2012). European Financial Management, Vol. 18, Issue 3, pp. 444-463, 2012, Available at SSRN: https://ssrn.com/abstract=2062688 or http://dx.doi.org/10.1111/j.1468-036X.2009.00536.x

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1
Abstract Views
681
PlumX Metrics