This paper develops a new approach that controls for commonalities in actively managed investment fund returns when measuring their performance. It is well-known that many investment funds may systematically load on common priced factors omitted from popular models, exhibit similarities in their choices of specific stocks and industries, or vary their risk-loadings in a similar way over time. We propose a parsimonious model that uses the return on the group of mutual funds as a benchmark for each individual fund within that group. We demonstrate that this model substantially reduces the correlation between fund residuals from standard models used for equity and fixed-income funds, and improves the estimates of fund α's and β's from commonly used equity and fixed-income models.
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- Brown, Stephen J & Goetzmann, William N, 1995.
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NBER Working Papers
8653, National Bureau of Economic Research, Inc.
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- Wayne E. Ferson & Andrew F. Siegel, 2006. "Testing Portfolio Efficiency with Conditioning Information," NBER Working Papers 12098, National Bureau of Economic Research, Inc.
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