Reexamining Fund Manager Skill From a New Angle

Managerial Finance 42 (8), 746-762.

30 Pages Posted: 17 Feb 2014 Last revised: 25 Feb 2020

See all articles by Qiang Bu

Qiang Bu

Penn State Harrisburg - School of Business Administration

Nelson Lacey

University of Massachusetts at Amherst

Date Written: January 10, 2014

Abstract

This paper examines managerial skill of U.S. equity mutual funds in the context of both abnormal return and risk. We recognize the role of fund life cycle and use different evaluation horizons to control for fund age and the overall state of the market. We find that a small percentage of equity funds can beat the market, and the percentage is overall higher than what the control group would predict. We find no evidence of persistence. We also document that the chance of underperformance is much higher than what we’d expect from our control group. Taking the risk return tradeoff into account, any performance advantage of actual funds over bootstrapped funds is correlated with tail risk, and a robustness check confirms this finding. Thus, the complete story of mutual fund alpha, should it exist, would not be complete without incorporating both risk and luck.

Keywords: Equity funds; Outperformance; Bootstrapped funds; Risk distribution; Cumulative distribution function (CDF)

JEL Classification: G11, G12

Suggested Citation

Bu, Qiang and Lacey, Nelson J., Reexamining Fund Manager Skill From a New Angle (January 10, 2014). Managerial Finance 42 (8), 746-762., Available at SSRN: https://ssrn.com/abstract=2395622 or http://dx.doi.org/10.2139/ssrn.2395622

Qiang Bu (Contact Author)

Penn State Harrisburg - School of Business Administration ( email )

777 W. Harrisburg Pike
Middletown, PA 17057
United States
717-948-6164 (Phone)

Nelson J. Lacey

University of Massachusetts at Amherst ( email )

School of Management
Amherst, MA 01003
United States
413-545-5630 (Phone)
413-545-3858 (Fax)

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