When Opportunity Knocks: Cross-Sectional Return Dispersion and Active Fund Performance

Anna von Reibnitz

Critical Finance Review, 2017, vol. 6, issue 2, 303-356

Abstract: Active opportunity in the market, measured by cross-sectional dispersion in stock returns, significantly influences fund performance. Active strategies have the greatest impact on returns during periods of high dispersion, when alpha produced by the most active funds significantly exceeds that produced in other months. The outperformance of the most relative to the least active funds is also concentrated in months of high dispersion. Deciding when to invest in active funds, therefore, can be as important to generating outperformance as deciding which funds to invest in. Switching between highly active and passive funds based on dispersion produces significant alpha of over 2.7% p.a. after fees. This paper adds a new dimension to understanding how active funds can be used to generate value, by combining identification of which managers have the greatest potential to outperform the market with insight into when the market is most conducive to outperformance.

Keywords: Mutual funds; Return dispersion; Active management (search for similar items in EconPapers)
JEL-codes: C20 C23 G11 G14 (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://dx.doi.org/10.1561/104.00000040 (application/xml)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:now:jnlcfr:104.00000040

Access Statistics for this article

More articles in Critical Finance Review from now publishers
Bibliographic data for series maintained by Lucy Wiseman ().