How Active Is Your Fund Manager? A New Measure That Predicts Performance

Model uncertainty, performance persistence and flows

“…Prior studies have identified a host of variables that provide useful information for predicting fund performance, such as stock holdings and trades, passive assets, active share, return gap, and lagged macroeconomic indicators (Cohen et al 2005;Busse and Irvine 2006;Cremers and Petajisto 2006;Kacperczyk et al 2006;Christopherson et al 1998Christopherson et al , 1999. In contrast, I consider the pooling of information from different mutual fund return generating models.…”

“…Busse and Irvine (2006) demonstrate that seemingly unrelated passive assets also provide useful information for forecasting. 12 Cremers and Petajisto (2006) show that the actively managed portion of equity fund portfolios also predict fund performance while Kacperczyk et al (2006) find that the difference between a fund's reported return and its hypothetical portfolio return-the return gap-also predicts future returns. Christopherson et al (1998Christopherson et al ( , 1999 show that conditional alphas, which incorporate information in lagged macroeconomic variables, are better at predicting equity pension fund returns than unconditional alphas.…”

Modelling Alpha in a CAPM with Heterogenous Beliefs

“…There is considerable evidence that the share of active investment has been decreasing over time. Cremers and Petajisto (2009) find that between 1983 and 2003 there was a significant decline in the proportion of mutual funds that have a high active share, i.e. even the actively managed funds become more and more passive.…”

“…8 We denote by � ( � ) investor i's ex post (experienced) utility under the true expected returns if she has invested according to the belief � , i.e.…”

“…Proposition 5.1 therefore provides a theoretical explanation for the empirical observation that the share of active investment has been declining constantly over the last twenty years (cf. Cremers & Petajisto, 2009). Clearly, in reality we will always observe active investment as the economy is not stationary.…”