Skill or Luck? The Outperformance of Highly Active Funds
37 Pages Posted: 15 Aug 2014 Last revised: 17 Apr 2015
Date Written: April 17, 2015
We distinguish luck from skill in fund portfolios of differing activeness by applying bootstrap simulations. Bootstrapping is important as heterogeneous risk taking according to the activeness of a fund’s strategies can bias standard significance tests, causing non-normalities in the cross-section of fund returns and residuals. We find that a portfolio comprising the most active funds demonstrates the greatest proportion of managerial skill, as against luck, in producing positive alpha. While isolating investments to highly active funds will not filter out all unskilled managers, it will increase the likelihood of picking managers with the genuine skill to enhance investor wealth.
Keywords: Mutual funds, active management, luck versus skill
JEL Classification: G11, G14, G20, G23
Suggested Citation: Suggested Citation