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 S. 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

Harvard University - Harvard Kennedy School (HKS)

79 John F. Kennedy Street
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jayendu S. Patel (Contact Author)

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Richard J. Zeckhauser

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)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-496-3783 (Fax)

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