Portfolios of Actively Managed Mutual Funds

60 Pages Posted: 20 Sep 2019

See all articles by Timothy B. Riley

Timothy B. Riley

University of Arkansas - Department of Finance

Date Written: September 19, 2019

Abstract

Investors should focus on the performance of portfolios of active funds, not on the performance of individual active funds. Taking this portfolio approach with respect to active U.S. equity mutual funds, I build an optimized portfolio of funds that subsequently has low idiosyncratic volatility and a large, positive, statistically significant alpha. Consistent with a Berk and Green (2004) equilibrium, that outperformance is short lived if the optimized portfolio is not rebalanced often, as investors allocate substantial capital — in excess of that expected based on past performance — to the funds with a large weight in the optimized portfolio.

Keywords: Mutual Fund, Active Management, Portfolio, Optimal, Alpha, Volatility, Information Ratio, Performance, Flow, Equilibrium, Skill

Suggested Citation

Riley, Timothy Brandon, Portfolios of Actively Managed Mutual Funds (September 19, 2019). Available at SSRN: https://ssrn.com/abstract=3456817 or http://dx.doi.org/10.2139/ssrn.3456817

Timothy Brandon Riley (Contact Author)

University of Arkansas - Department of Finance ( email )

Fayetteville, AR 72701
United States

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