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Benchmarking Money Manager Performance: Issues and Evidence

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  • Josef Lakonishok
  • Louis Chan
  • Stephen G. Dimmock

Abstract

Academic and practitioner research yields a proliferation of methods using size and value/growth attributes or factors to evaluate portfolio performance. We assess the relative merits of several of the most widely-used procedures, including variants of matched-characteristic benchmark portfolios and time-series return regressions, by applying them to a sample of active money managers and passive indexes. Estimated abnormal returns display large variation across approaches. The benchmarks most widely used in academic research --- attribute-matched portfolios from independent sorts, the conventional three-factor time series model, and cross-sectional regressions of returns on stock characteristics --- have poor ability to track returns. Simple alterations are provided that improve the performance of the methods.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12461.

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Date of creation: Aug 2006
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Publication status: published as Louis K. C. Chan & Stephen G. Dimmock & Josef Lakonishok, 2009. "Benchmarking Money Manager Performance: Issues and Evidence," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 22(11), pages 4553-4599, November.
Handle: RePEc:nbr:nberwo:12461

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  1. Ikenberry, David & Lakonishok, Josef & Vermaelen, Theo, 1995. "Market underreaction to open market share repurchases," Journal of Financial Economics, Elsevier, Elsevier, vol. 39(2-3), pages 181-208.
  2. Lakonishok, Joseph & Shleifer, Andrei & Vishny, Robert W., 1992. "The Structure and Performance of the Money Management Industry," Scholarly Articles 10498059, Harvard University Department of Economics.
  3. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W, 1994. " Contrarian Investment, Extrapolation, and Risk," Journal of Finance, American Finance Association, American Finance Association, vol. 49(5), pages 1541-78, December.
  4. Elton, Edwin J, et al, 1993. "Efficiency with Costly Information: A Reinterpretation of Evidence from Managed Portfolios," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 6(1), pages 1-22.
  5. Louis K.C. Chan & Jason Karceski & Josef Lakonishok, 1999. "On Portfolio Optimization: Forecasting Covariances and Choosing the Risk Model," NBER Working Papers 7039, National Bureau of Economic Research, Inc.
  6. Lakonishok, Josef & Lee, Inmoo, 2001. "Are Insider Trades Informative?," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 14(1), pages 79-111.
  7. Daniel, Kent & Titman, Sheridan, 1997. " Evidence on the Characteristics of Cross Sectional Variation in Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 52(1), pages 1-33, March.
  8. Mark L. Mitchell & Erik Stafford, 1997. "Managerial Decisions and Long-Term Stock Price Performance," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 453, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  9. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 427-65, June.
  10. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, American Finance Association, vol. 52(1), pages 57-82, March.
  11. Chan, Louis K C & Hamao, Yasushi & Lakonishok, Josef, 1991. " Fundamentals and Stock Returns in Japan," Journal of Finance, American Finance Association, American Finance Association, vol. 46(5), pages 1739-64, December.
  12. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, Elsevier, vol. 43(2), pages 153-193, February.
  13. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, American Finance Association, vol. 51(1), pages 55-84, March.
  14. Coggin, T Daniel & Fabozzi, Frank J & Rahman, Shafiqur, 1993. " The Investment Performance of U.S. Equity Pension Fund Managers: An Empirical Investigation," Journal of Finance, American Finance Association, American Finance Association, vol. 48(3), pages 1039-55, July.
  15. Chan, Louis K C & Karceski, Jason & Lakonishok, Josef, 1999. "On Portfolio Optimization: Forecasting Covariances and Choosing the Risk Model," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 12(5), pages 937-74.
  16. Louis K. C. Chan & Hsiu-Lang Chen & Josef Lakonishok, 2002. "On Mutual Fund Investment Styles," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 15(5), pages 1407-1437.
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Cited by:
  1. Daniel Buncic & Jon E. Eggins & Robert J. Hill, 2010. "Mutual Fund Style, Characteristic-Matched Performance Benchmarks and Activity Measures: A New Approach," University of St. Gallen Department of Economics working paper series 2010, Department of Economics, University of St. Gallen 2010-20, Department of Economics, University of St. Gallen.
  2. Anastasia Petraki & Anna Zalewska, . "Jumping over a low hurdle: Personal pension fund performance Abstract: This study analyses a sample of 8,255 UK personal pension funds operated by 60 providers over a 30 years’ period (1980 – 2009," The Centre for Market and Public Organisation, Department of Economics, University of Bristol, UK 13/305, Department of Economics, University of Bristol, UK.
  3. Martijn Cremers & Antti Petajisto & Eric Zitzewitz, 2012. "Should Benchmark Indices Have Alpha? Revisiting Performance Evaluation," NBER Working Papers 18050, National Bureau of Economic Research, Inc.
  4. Shaun Bond & Paul Mitchell, 2010. "Alpha and Persistence in Real Estate Fund Performance," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 41(1), pages 53-79, July.
  5. Elizabeth Ooi & Paul Lajbcygier, 2013. "Virtue Remains After Removing Sin: Finding Skill Amongst Socially Responsible Investment Managers," Journal of Business Ethics, Springer, Springer, vol. 113(2), pages 199-224, March.
  6. Larcker, David F. & So, Eric C. & Wang, Charles C.Y., 2013. "Boardroom centrality and firm performance," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 55(2), pages 225-250.
  7. Isabel Abinzano & Luis Muga & Rafael Santamaria, 2010. "Do Managerial Skills Vary Across Fund Managers? Results Using European Mutual Funds," Journal of Financial Services Research, Springer, Springer, vol. 38(1), pages 41-67, August.
  8. Fletcher, Jonathan, 2014. "Benchmark models of expected returns in U.K. portfolio performance: An empirical investigation," International Review of Economics & Finance, Elsevier, Elsevier, vol. 29(C), pages 30-46.
  9. Larcker, David F. & So, Eric C. & Wang, Charles C. Y., 2010. "Boardroom Centrality and Stock Returns," Research Papers, Stanford University, Graduate School of Business 2061, Stanford University, Graduate School of Business.
  10. Zhi Da & Pengjie Gao & Ravi Jagannathan, 2007. "When Does a Mutual Fund's Trade Reveal its Skill?," NBER Working Papers 13625, National Bureau of Economic Research, Inc.
  11. Alain Guéniche, 2013. "Choosing an appropriate equity index," Post-Print, HAL dumas-00934738, HAL.
  12. Wagner, Niklas & Winter, Elisabeth, 2013. "A new family of equity style indices and mutual fund performance: Do liquidity and idiosyncratic risk matter?," Journal of Empirical Finance, Elsevier, Elsevier, vol. 21(C), pages 69-85.
  13. Martijn Cremers & Antti Petajisto & Eric Zitzewitz, 2008. "Should Benchmark Indices Have Alpha? Revisiting Performance," Yale School of Management Working Papers, Yale School of Management amz2452, Yale School of Management, revised 26 Jan 2010.

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