When Opportunity Knocks: Cross-Sectional Return Dispersion and Active Fund Performance

Critical Finance Review, Forthcoming

26th Australasian Finance and Banking Conference 2013

58 Pages Posted: 11 Aug 2013 Last revised: 16 Nov 2015

See all articles by Anna Helen von Reibnitz

Anna Helen von Reibnitz

Australian National University (ANU); Financial Research Network (FIRN)

Date Written: September 14, 2015

Abstract

Active opportunity in the market, measured by cross-sectional dispersion in stock returns, significantly influences fund performance. Active strategies have the greatest impact on returns during periods of high dispersion, when alpha produced by the most active funds significantly exceeds that produced in other months. The outperformance of the most relative to the least active funds is also concentrated in months of high dispersion. Deciding when to invest in active funds, therefore, can be as important to generating outperformance as deciding which funds to invest in. Switching between highly active and passive funds based on dispersion produces significant alpha of over 2.7% p.a. after fees. This paper adds a new dimension to understanding how active funds can be used to generate value, by combining identification of which managers have the greatest potential to outperform the market with insight into when the market is most conducive to outperformance.

Keywords: Mutual funds, return dispersion, active management

JEL Classification: G11, G14, G20, G23

Suggested Citation

von Reibnitz, Anna Helen, When Opportunity Knocks: Cross-Sectional Return Dispersion and Active Fund Performance (September 14, 2015). Critical Finance Review, Forthcoming; 26th Australasian Finance and Banking Conference 2013. Available at SSRN: https://ssrn.com/abstract=2308215 or http://dx.doi.org/10.2139/ssrn.2308215

Anna Helen Von Reibnitz (Contact Author)

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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