Active Sector Funds and Fund Manager Skill

42 Pages Posted: 15 Aug 2018 Last revised: 22 Dec 2019

See all articles by Huangyu Chen

Huangyu Chen

Boston University

Dirk Hackbarth

Boston University - Department of Finance & Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: November 17, 2019


We investigate the performance of active sector funds whose potential outperformance has not been exhausted entirely by decreasing returns to scale. We document that despite of good track records, most sector funds are relatively smaller than their equilibrium fund sizes — at which they are expected to generate zero net alphas. In particular, from 1998 to 2016, a passive indexation strategy of actively managed sector funds earns an annual benchmark-adjusted return of 5.70% and a monthly alpha of 27 basis points. Moreover, the strategy’s outperformance is present in market downturns (i.e., resilient to tail risk) and robust to change of rebalancing frequency and inclusion of expenses. We provide one alpha arithmetic as an explanation for the strategy’s success and as a principle for creating similar portfolio strategies.

Keywords: alpha, managerial skill, mutual funds, passive investing

JEL Classification: G11, G20, G23

Suggested Citation

Chen, Huangyu and Hackbarth, Dirk, Active Sector Funds and Fund Manager Skill (November 17, 2019). Available at SSRN: or

Huangyu Chen (Contact Author)

Boston University ( email )

United States

Dirk Hackbarth

Boston University - Department of Finance & Economics ( email )

Department of Finance
595 Commonwealth Avenue
Boston, MA 02215
United States
(617) 358-4206 (Phone)
(617) 353-6667 (Fax)


Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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