Mutual Fund Performance: A Market Efficiency Perspective

Investment Analysts Journal, 45(4), 1-15 (2016)

26 Pages Posted: 31 Oct 2015 Last revised: 22 Jun 2016

See all articles by Tim Verheyden

Tim Verheyden

Arabesque Partners; Vrije Universiteit Brussel - Faculty of Economic and Social Sciences and Solvay Business School

Lieven De Moor

Vrije Universiteit Brussel

Rosanne Vanpee

KU Leuven Faculty of Economics and Business

Date Written: 2016

Abstract

This study reconciles existing literature on stock market efficiency and mutual fund performance by developing a framework that allows testing whether fund managers are able to exploit market inefficiencies. We find a positive relationship between alpha and weak form market efficiency. Most funds are unable to systematically outperform the market, although a few funds do seem to handle relatively inefficient markets well. Top performing funds are characterized by a better management of downside risk in times of market distress, whilst simultaneously exploiting learning effects when markets return to equilibrium. Conditioning fund performance on the state of the underlying market we propose a conditional alpha ratio, which helps in better understanding fund performance and can improve the fund selection process for investors.

Keywords: Mutual fund performance, time-varying weak-form market efficiency, adaptive markets hypothesis

JEL Classification: G10, G12, G14

Suggested Citation

Verheyden, Tim and De Moor, Lieven and Vanpee, Rosanne, Mutual Fund Performance: A Market Efficiency Perspective (2016). Investment Analysts Journal, 45(4), 1-15 (2016). Available at SSRN: https://ssrn.com/abstract=2683594

Tim Verheyden (Contact Author)

Arabesque Partners ( email )

43 Grosvenor Street
LONDON, W1K 3HL
United Kingdom
+447878679314 (Phone)

HOME PAGE: http://www.arabesque.com/s-ray

Vrije Universiteit Brussel - Faculty of Economic and Social Sciences and Solvay Business School ( email )

Pleinlaan 2
Brussels, 1050
Belgium

Lieven De Moor

Vrije Universiteit Brussel ( email )

Department of Business
Pleinlaan 2
Brussels, B-1050
Belgium
+32 498 616463 (Phone)

HOME PAGE: http://goo.gl/qntmYg

Rosanne Vanpee

KU Leuven Faculty of Economics and Business ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

HOME PAGE: http://scholar.google.be/citations?user=yhAZIHEAAAAJ&hl=en

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