Bayesian nonparametric learning of how skill is distributed across the mutual fund industry

Measuring Skill in the Mutual Fund Industry∗

Using the dollar-value that a mutual fund adds as the measure of skill, we find that the average mutual fund adds about $2 million per year and that this skill persists for as long as 10 years. We further document that investors recognize this skill and reward it by investing more capital with better funds. Better funds earn higher aggregate fees, and there is a strong positive correlation betw...

The MUTUAL FUND INDUSTRY

Mutual fund performance with learning across funds

The average level and cross-sectional variability of fund alphas are estimated from a large sample of mutual funds. This information is incorporated, along with the usual regression estimate of alpha, in a (roughly) precision-weighted average measure of individual fund performance. Substantial ‘‘learning across funds’’ is documented, with significant effects on investment decisions. In a Bayesi...

Mutual Fund Performance: Luck or Skill?

Should individuals include actively managed mutual funds in their investment portfolios? They should if and only if the result of active management is superior performance due to skill. This paper employs a previously ignored statistical technique to detect whether skill drives the superior performance of some mutual funds. This technique, the generalized binomial distribution, models a sequenc...

Competition and Conflicts of Interest the U.S. Mutual Fund Industry*

Mutual fund investors desire high risk-adjusted performance at low cost, which may not necessarily be the objective of fund families. Fund families want to maximize assets under management (i.e., their market share) and the resulting management fees. This paper studies the extent to which conflicts of interest are mitigated by competition in the mutual fund industry using the universe of U.S. m...