IDEAS home Printed from https://ideas.repec.org/p/fip/fedgfe/103342.html

Skill and Efficiency in the U.S. Mutual Fund Industry

Author

Abstract

We propose a new measure of mutual fund manager ability: "efficiency" is the ability to accrue the risk premium associated with a risk factor. The familiar abnormal return, or alpha, is shown to be the sum of two distinct measures of ability: "aggregate efficiency" which is the beta-weighted sum of the fund's (in)efficiencies across risk factors, and "skill," the component that is unrelated to factor exposures. Using a panel of U.S. equity mutual fund returns from 1999-2023, we document significant heterogeneity in mutual fund manager skill and efficiency. We employ regression trees and their extensions to capture this heterogeneity. We find that efficiency is more persistent than skill, and we show that future abnormal returns can be better predicted by decomposing lagged abnormal returns into skill and efficiency.

Suggested Citation

  • Dong Hwan Oh & Andrew J. Patton, 2026. "Skill and Efficiency in the U.S. Mutual Fund Industry," Finance and Economics Discussion Series 2026-032, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:103342
    DOI: 10.17016/FEDS.2026.032
    as

    Download full text from publisher

    File URL: https://www.federalreserve.gov/econres/feds/files/2026032pap.pdf
    File Function: Full text
    Download Restriction: no
    File URL: https://libkey.io/10.17016/FEDS.2026.032?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:103342. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ryan Wolfslayer ; Keisha Fournillier (email available below). General contact details of provider: https://edirc.repec.org/data/frbgvus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.