Trading Skills of Mutual Fund Managers: Evidence Based on Daily Transactions
57 Pages Posted: 22 Jul 2020 Last revised: 10 Feb 2022
Date Written: December 9, 2021
This paper presents a unique out of sample test that evaluates fund managers’ trading skills. We document strong evidence of positive short term trading performance for both buys and sells lasting up to one month. By establishing a link between a fund’s trade data, holdings, and reported net returns, we demonstrate that trading performance translates almost one to one into fund performance. Furthermore, we find that trading performance differs significantly across funds and is highly persistent in abnormal short term returns. We argue that trading skill is a manager attribute that is also related to fund size and expenses. We rule out price pressure as the reason for the documented short term performance. Instead, liquidity provision makes an important contribution. These results offer new evidence that managers provide value to their clients through above par investment skills.
Keywords: Mutual funds, trading, performance, manager skill
JEL Classification: G11, G23
Suggested Citation: Suggested Citation