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Mutual fund performance evaluation with active peer benchmarks

Author

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  • Hunter, David
  • Kandel, Eugene
  • Kandel, Shmuel
  • Wermers, Russ

Abstract

We propose a simple approach to account for commonalities in mutual fund strategies that relies solely on information on fund returns and investment objectives. Our approach augments commonly used factor models with an additional benchmark that represents an equal investment in all same-category funds, which we call an active peer benchmark (APB). We find that APBs substantially reduce the average time series correlation of residuals between individual funds within a group when added to a four-factor equity model (or to a seven-factor fixed-income model). Importantly, adding this APB significantly improves the selection of funds with future outperformance.

Suggested Citation

  • Hunter, David & Kandel, Eugene & Kandel, Shmuel & Wermers, Russ, 2014. "Mutual fund performance evaluation with active peer benchmarks," Journal of Financial Economics, Elsevier, vol. 112(1), pages 1-29.
  • Handle: RePEc:eee:jfinec:v:112:y:2014:i:1:p:1-29
    DOI: 10.1016/j.jfineco.2013.12.006
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    References listed on IDEAS

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    1. repec:eee:jbfina:v:87:y:2018:i:c:p:351-368 is not listed on IDEAS
    2. Zhongzhi Lawrence He, 2018. "Generalized Information Ratio," Papers 1803.01381, arXiv.org, revised Apr 2018.
    3. Mason, Andrew & Agyei-Ampomah, Sam & Skinner, Frank, 2016. "Realism, skill, and incentives: Current and future trends in investment management and investment performance," International Review of Financial Analysis, Elsevier, vol. 43(C), pages 31-40.
    4. Babalos, Vassilios & Mamatzakis, Emmanuel C. & Matousek, Roman, 2015. "The performance of US equity mutual funds," Journal of Banking & Finance, Elsevier, vol. 52(C), pages 217-229.
    5. Obrimah, Oghenovo A., 2016. "How important is innovation for venture capitalists’ (VCs’) market reputation?," The Quarterly Review of Economics and Finance, Elsevier, vol. 61(C), pages 64-76.

    More about this item

    Keywords

    Mutual funds; Performance measurement;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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