Can Mutual Fund 'Stars' Really Pick Stocks? New Evidence from a Bootstrap Analysis
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What they found
The authors asked whether the best-performing mutual fund managers are skilled or just the lucky tail of a large population. Using bootstrap methods on 1,788 U.S. equity funds from 1975 to 2002, they simulated the distribution of the top funds' alphas under the assumption that no manager has skill and compared it to the actual top funds. The observed top performers had alphas too large to be explained by luck alone, especially among growth-oriented funds, and their outperformance persisted. But the skilled group was small, and the bulk of funds showed no skill after fees.
What you can use
- A small minority of fund managers show skill that cannot be explained by luck, but most of the industry does not.
- To tell skill from luck you need to compare the best performers against what pure luck would produce in a population that size; a good record alone is not enough.
- The same test applies to trading communities: in a group of a thousand traders, a few will have spectacular records by chance.
Caveats
Skill is measured net of a factor model whose choice matters. Mutual funds only; the paper is technical.
Tags: professional, mutual-funds, skill, luck, bootstrap
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.