Conditional Benchmarks and Predictors of Mutual Fund Performance

Scott Cederburg, O’Doherty, Michael S., N. E. Savin and Ashish Tiwari

Critical Finance Review, 2018, vol. 7, issue 2, 331-372

Abstract: Recent studies link mutual fund performance to measures of active management, and this evidence often takes the form of large spreads in unconditional alphas for characteristic-sorted portfolios. Unconditional benchmarks can, however, produce misleading inferences on managerial skill for strategies that exhibit substantial turnover and unstable factor exposures. We propose a performance attribution model that accounts for predictable changes in portfolio style. Compared to existing methods, our benchmarks yield superior tracking performance and a more powerful statistical assessment of abnormal returns. We re-evaluate six active management proxies using our method and conclude that these measures are largely unrelated to managerial ability.

JEL-codes: G11 G23 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:now:jnlcfr:104.00000062

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