Reexamining fund manager skill from a new angle

Qiang Bu, Nelson Lacey

Research output: Contribution to journalArticlepeer-review

Abstract

Purpose – The purpose of this paper is to examine managerial skill of US equity mutual funds in the context of both abnormal return and risk. Design/methodology/approach – The authors evaluate manager skill based on the outperforming probability and cumulative distribution function of the actual funds and the bootstrapped funds. And the authors recognize the role of fund life cycle and use different evaluation horizons to control for fund age and the overall state of the market. Findings – The authors find that a small percentage of equity funds can beat the market, and the percentage is overall higher than what the control group would predict. The authors find no evidence of persistence. The authors also document that the chance of underperformance is much higher than what the authors had expect from the control group. Taking the risk-return tradeoff into account, any performance advantage of actual funds over bootstrapped funds is correlated with tail risk, and a robustness check confirms this finding. Originality/value – The authors find that the outperforming probability itself is not enough to confirm the existence of manager skill. The complete story of mutual fund alpha, should it exist, would not be complete without incorporating both risk and luck.

Original languageEnglish (US)
Pages (from-to)746-762
Number of pages17
JournalManagerial Finance
Volume42
Issue number8
DOIs
StatePublished - Aug 8 2016

All Science Journal Classification (ASJC) codes

  • Business, Management and Accounting (miscellaneous)
  • Finance

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