Should Investors Avoid All Actively Managed Mutual Funds? A Study in Bayesian Performance Evaluation

Posted: 13 Jun 2001

See all articles by Klaas Baks

Klaas Baks

Emory University - Department of Finance

Jessica A. Wachter

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Andrew Metrick

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Abstract

This paper analyzes mutual-fund performance from an investor's perspective. We study the portfolio-choice problem for a mean-variance investor choosing among a risk-free asset, index funds, and actively managed mutual funds. To solve this problem, we employ a Bayesian method of performance evaluation; a key innovation in our approach is the development of a flexible set of prior beliefs about managerial skill. We then apply our methodology to a sample of 1,437 mutual funds. We find that some extremely skeptical prior beliefs nevertheless lead to economically significant allocations to active managers.

JEL Classification: G12, G14

Suggested Citation

Baks, Klaas and Wachter, Jessica A. and Metrick, Andrew, Should Investors Avoid All Actively Managed Mutual Funds? A Study in Bayesian Performance Evaluation. Journal of Finance, Vol. 56, February 2001. Available at SSRN: https://ssrn.com/abstract=238513

Klaas Baks

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States

Jessica A. Wachter

University of Pennsylvania - Finance Department ( email )

The Wharton School
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Philadelphia, PA 19104
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215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Andrew Metrick (Contact Author)

Yale School of Management ( email )

165 Whitney Avenue
New Haven, CT 06511
United States
(203)-432-3069 (Phone)

HOME PAGE: http://faculty.som.yale.edu/andrewmetrick/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

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