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ODDS ARE YOUR MUTUAL FUNDS SUCK

16 August 2009 by Cullen Roche 2 Comments

A great piece of required reading for all investors who use mutual funds in their investment strategies.

This paper develops a simple technique that controls for “false discoveries,” or mutual funds that exhibit significant alphas by luck alone. Our approach precisely separates
funds into (1) unskilled, (2) zero-alpha, and (3) skilled funds, even with dependencies
in cross-fund estimated alphas. We find that 75% of funds exhibit a zero alpha (net of
expenses), consistent with the Berk and Green (2004) equilibrium. Further, we find a
significant proportion of skilled (positive alpha) funds prior to 1996, but almost none
by 2006. We also show that controlling for false discoveries substantially improves the
ability to find funds with persistent performance.


badmf –

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