Mutual Fund Performance Evaluation with Active Peer Benchmarks

IE. Kandel, D. Hunter, and R. Wermers dedicate this paper to the memory of our valued friend and colleague, Shmuel Kandel, who inspired us and contributed mightily to this project. Corresponding author: R. Wermers, [email protected] (email), 301-405-0572 (tel), 301-405-0359 (fax). We gratefully acknowledge useful comments from an anonymous referee, and suggestions from the participants of the Gerzensee Summer Finance Conference (2007); the Financial Economics Conference in Memory of Shmuel Kandel (2007; Tel Aviv University), the Nova Annual Finance Conference (2008; ISCTE Business School; Lisbon, Portugal) and especially Yufeng Han (the discussant); the Leading Lights in Fund Management Conference (2009; Cass Business School; London, UK); the American Finance Association Annual Meetings (2010; Atlanta) and especially Melvyn Teo (the discussant); the China International Conference in Finance (2011; Wuhan, PRC) and especially Jay Wang (the discussant); Sun Yat Sen University (2011); the Asian Finance Association Annual Meetings (2011; Macao, PRC) and especially Qi Zeng (the discussant), and the Wharton School at the University of Pennsylvania. We also gratefully acknowledge the receipt of the Gutmann Prize from the University of Vienna for an earlier version of this paper, and of the CFA Institute Best Paper Award from the 2011 Asian Finance Association Annual Meetings. E. Kandel and S. Kandel benefitted from financial support from the Israeli Science Foundation for Financial Support. E. Kandel would also like to thank the Krueger Center for Finance Research at Hebrew University for financial support. 1As of 2010, households hold 37.8% of total assets in financial assets. Of financial assets, 15% are held in pooled investment funds, not including holdings in retirement accounts or money market funds, while 18% are directly held in stocks and bonds. An additional 38.4% is held in retirement accounts, much of which is allocated to mutual funds (Board of Governors of the Federal Reserve System, 2010).