40 Pages Posted: 20 Jul 2000 Last revised: 10 Jun 2008
Date Written: June 1990
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: 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