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Hot Hands in Mutual Funds: the Persistence of Performance, 1974-87

40 Pages Posted: 20 Jul 2000 Last revised: 10 Jun 2008

Darryll Hendricks

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Jayendu Patel

Harvard University

Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Date Written: June 1990

Abstract

The net returns of no-load mutual growth funds exhibit a hot-hands phenomenon during 1974-87. When performance is measured by Jensen's alpha, mutual funds that perform well in a one year evaluation period continue to generate superior performance in the following year. Underperformers also display short-run persistence. Hot hands persists in 1988 and 1989. The success of the hot hands strategy does not derive from selecting superior funds over the sample period. The timing component -- knowing when to pick which fund -- is significant. These results are robust to alternative equity portfolio benchmarks, such as those that account for firm-size effects and mean reversion in returns. Capitilizing on the hot hands phenomenon, an investor could have generated a significant, risk-adjusted excess return of 10% per year.

Suggested Citation

Hendricks, Darryll and Patel, Jayendu and Zeckhauser, Richard J., Hot Hands in Mutual Funds: the Persistence of Performance, 1974-87 (June 1990). NBER Working Paper No. w3389. Available at SSRN: https://ssrn.com/abstract=226676

Darryll Hendricks

National Bureau of Economic Research (NBER)

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Harvard University - Harvard Kennedy School (HKS)

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United States

Jayendu Patel (Contact Author)

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Richard Zeckhauser

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-495-1174 (Phone)
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Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-384-9340 (Fax)

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