Hot Hands in Mutual Funds: The Persistence of Performance, 1974-87

Darryll Hendricks, Jayendu Patel and Richard Zeckhauser

No 3389, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The net returns of no-load mutual growth funds exhibit a hot-hands phenomenon during 1974-87. When performance is measured by Jensen's alpha, mutual funds that perform well in a one year evaluation period continue to generate superior performance in the following year. Underperformers also display short-run persistence. Hot hands persists in 1988 and 1989. The success of the hot hands strategy does not derive from selecting superior funds over the sample period. The timing component -- knowing when to pick which fund -- is significant. These results are robust to alternative equity portfolio benchmarks, such as those that account for firm-size effects and mean reversion in returns. Capitilizing on the hot hands phenomenon, an investor could have generated a significant, risk-adjusted excess return of 10% per year.

Date: 1990-06
Note: ME
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Citations: View citations in EconPapers (5)

Published as "Hot Hands in Mutual Funds: Short-Run Persistence of Performance, 1974-1988 ," Journal of Finance, vol 48, no 1, March 1993, pp 93-130.

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