Hot Hands in Mutual Funds: Short-Run Persistence of Relative Performance, 1974-1988

Hendricks, Darryll; Patel, Jayendu; Zeckhauser, Richard

doi:10.2307/2328883

Cited by 399 publications

(398 citation statements)

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“…Furthermore, since risk-adjusted performance was found to be persistent, it would have been possible, based on ex ante information, for investors to identify high performance funds, and pursue an investment strategy that outperformed the passive benchmark. Similar evidence of persistence in the performance of (particularly the poorest performing) mutual fund managers has been reported by Lehmann and Modest (1987), Grinblatt and Titman (1992), Hendricks et al (1993), Brown and Goetzmann (1995) and Carhart (1997).…”

Section: Performance Following Inceptionsupporting

confidence: 77%

“…Following the analysis of Hendricks et al (1993) we sorted, for each month, funds into quartiles based on their abnormal performance over the previous 24 months. Only funds with a complete record of returns over this period were considered.…”

Section: Persistence Of Performancementioning

confidence: 99%

“…1 For a partial review of the US findings, see Brown and Goetzmann (1995), Carhart (1997), Elton, Gruber, Das and Hlavka (1993), Ferson and Schadt (1996), Grinblatt and Titman (1989), Grinblatt and Titman (1992), Gruber (1996), Hendricks, Patel and Zeckhauser (1993), Lehmann andModest (1987), andMalkiel (1995).…”

Section: Introductionmentioning

confidence: 99%

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Mutual Fund Performance: Evidence from the UK

Blake¹,

Timmermann²

1998

Review of Finance

184

101

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Abstract. This paper uses a large sample containing the complete return histories of 2300 UK openended mutual funds over a 23-year period to measure fund performance. We find some evidence of underperformance on a risk-adjusted basis by the average fund manager, persistence of performance and the existence of a substantial survivor bias. Similar findings have been reported for US equity mutual funds. New findings not previously documented for other markets include evidence that mutual fund performance varies substantially across different asset categories, especially foreign asset categories. We also identify some new patterns in performance related to the funds' distance from their inception and termination dates: underperformance intensifies as the fund termination date approaches, while, in contrast, there is some evidence that funds (weakly) outperform during their first year of existence.

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Section: Performance Following Inceptionsupporting

confidence: 77%

Section: Persistence Of Performancementioning

confidence: 99%

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Mutual Fund Performance: Evidence from the UK

Blake¹,

Timmermann²

1998

Review of Finance

184

101

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“…This section studies the effect of survivor and look-ahead bias on the persistence tests of Hendricks, Patel and Zeckhauser (1993) and Carhart (1997) in our sample of U.S. mutual funds. As discussed earlier, this empirical section can only characterize these biases for a particular survival rule, namely the one in effect for the U.S. mutual fund industry.…”

Section: B Evidencementioning

confidence: 99%

Mutual Fund Survivorship

et al. 2002

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This paper offers a comprehensive study of survivorship issues, in the context of mutual fund research, using the mutual fund data set of Carhart (1997). We find that funds in our sample disappear primarily because of multi-year poor performance. Then we demonstrate analytically that this survival rule typically causes the survivor bias in average performance to increase in the length of the sample period, though it is possible to construct counterexamples. In the data, we find a strong positive relation between the survivor bias in average performance and sample period length. The bias is economically small at 17 basis points per annum for one-year samples, but a significantly larger one percent per annum for samples longer than fifteen years. We also find evidence of performance persistence in our sample and, consistent with the presence of a multi-period survival rule, we find that the persistence is weakened by survivorship bias. Finally, we explain how the relation between performance and fund characteristics can be affected by the use of a survivor-only sample and show that the magnitudes of the biases in the slope coefficients are large for fund size, expenses, turnover and load fees in our sample. Because survivorship issues are relevant for many data sets used in finance, the analysis in this paper has potential applications in areas of financial economics beyond just mutual fund research.1 Survivorship bias affects almost every mutual fund study. Most commercially available mutual fund data sets include only funds currently in operation, and many commonly used research methodologies impose additional selection biases. With the exception of a few recent papers, however, researchers frequently ignore selection biases altogether or argue that their effect is insignificant. This attitude is unfortunate, as selection-bias issues pervade almost all empirical studies of panel and time-series data sets. This paper offers a comprehensive study of survivorship issues, in the context of mutual fund research. We examine how survivorship bias affects mutual fund studies both theoretically and empirically. We study the effect of survivorship on three types of mutual fund studies: (1) estimates of average performance, (2) tests of performance persistence, and (3) cross-section estimates of the relation between performance and fund attributes. The analysis divides survivorship bias into the separate but related issues of survivor bias and look-ahead bias, an important distinction rarely acknowledged in the literature. Our results indicate that survivorship bias substantially alters the inferences from mutual fund studies, but that the effects vary across test type, form of survivorship bias, and sample period length. Because survivorship issues are relevant for many data sets used in finance, the analysis in this paper has potential applications in areas of financial economics beyond just mutual fund research.A number of recent papers have addressed issues in mutual fund survivorship. Brown, Goetzmann, Ibbotso...

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“…As indicated by Droms (2006), "winners in one year tend to remain winners in the following year and losers have an even stronger tendency to remain losers" (Droms, 2006, p.60). This particular topic has gained importance in the mutual fund performance evaluation literature, and several significant studies have been published since the early 1990s acknowledging this reality (see, for instance Grinblatt and Titman, 1992;Brown and Goetzmann, 1995;Carhart, 1997;Hendricks et al, 1993;Elton et al, 1996;Hendricks et al, 1993, among others). More recently, Pätäri (2009) has provided an extensive literature review of mutual fund performance persistence, and Cremers andPetajisto (2009) andLoon (2011) have proposed new methods to report evidence of persistence, and also on how investors respond to previous performance rankings.…”

Section: Introductionmentioning

confidence: 99%

On the informativeness of persistence for evaluating mutual fund performance using partial frontiers

Matallín‐Sáez

Soler‐Domínguez

Tortosa‐Ausina

2014

Omega

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The last few years have witnessed a rapid evolution in the literature evaluating mutual fund performance using frontier techniques. The instruments applied, mostly DEA (Data Envelopment Analysis) and, to a lesser extent, FDH (Free Disposal Hull), are able to encompass several dimensions of performance, but they also have some disadvantages that might be preventing a wider acceptance. The recently developed order-m and order-α partial frontiers overcome some of the disadvantages (they are robust with respect to extreme values and noise, and do not suffer from the well-known curse of dimensionality) while keeping the main virtues of DEA and FDH (they are fully-nonparametric). In this article we apply not only the non-convex counterpart of DEA (FDH) but also order-m and order-α partial frontiers to a sample of US mutual funds. The results obtained for both order-m and order-α are useful, since a full ranking of the mutual funds' performance can be obtained. We merge these methods with the literature on mutual fund performance persistence. By combining the two literatures we derive an algorithm which establishes how the choice of m and α parameters intrinsic to order-m and order-α (respectively) relate to the existence of performance persistence and the contrarian effect.

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Hot Hands in Mutual Funds: Short-Run Persistence of Relative Performance, 1974-1988

Cited by 399 publications

References 0 publications

Mutual Fund Performance: Evidence from the UK

Mutual Fund Performance: Evidence from the UK

Mutual Fund Survivorship

On the informativeness of persistence for evaluating mutual fund performance using partial frontiers

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