The Cross-Section of Investing Skill
نویسنده
چکیده
Building on insights from the economics of superstars, I develop an efficient method for estimating the skill of mutual fund managers. Outliers are especially helpful for disentangling skill from luck when I explicitly model the cross-sectional distribution of managerial skill using a flexible and realistic function. Forecasted performance is dramatically improved relative to standard regression estimates: an investor selecting (avoiding) the best (worst) decile of funds would improve risk-adjusted performance by 2% (3%) annually. Forecasted performance also helps to predict fund flows, consistent with the smart money effect. The distribution of skill is found to be fat-tailed and positively skewed; its shape helps to explain the convexity of fund flows.
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