Maximum Drawdown as Predictor of Mutual Fund Performance and Flows

Financial Analysts Journal, 2022, 78(4): 59-76

67 Pages Posted: 18 Jul 2022 Last revised: 7 Dec 2022

See all articles by Timothy B. Riley

Timothy B. Riley

University of Arkansas - Department of Finance

Qing Yan

Towson University

Date Written: June 30, 2022

Abstract

Mutual funds’ maximum drawdowns are persistent, indicative of manager skill, and predictive of subsequent performance. Among funds with relatively strong past performance, those with relatively low past maximum drawdowns, on average, have an out of sample alpha of 2.40% per year. That alpha is magnified when markets are turbulent—a time during which manager skill should be most valuable. Investors are averse to drawdown risk. After controlling for typical measures of past performance, fund flows remain a decreasing function of maximum drawdowns, particularly among investors with greater risk aversion and during times of heightened risk aversion.

Keywords: Mutual Fund, Drawdown, Alpha, Skill, Flow

Suggested Citation

Riley, Timothy Brandon and Yan, Qing, Maximum Drawdown as Predictor of Mutual Fund Performance and Flows (June 30, 2022). Financial Analysts Journal, 2022, 78(4): 59-76, Available at SSRN: https://ssrn.com/abstract=4150870

Timothy Brandon Riley (Contact Author)

University of Arkansas - Department of Finance ( email )

Fayetteville, AR 72701
United States

Qing Yan

Towson University ( email )

8000 York Road
Towson, MD 21252
United States

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