Working Paper: NBER ID: w3389
Authors: Darryll Hendricks; Jayendu Patel; Richard Zeckhauser
Abstract: The net returns of no-load mutual growth funds exhibit a hot-hands phenomenon during 1974-87. When performance is measured by Jensen's alpha, mutual funds that perform well in a one year evaluation period continue to generate superior performance in the following year. Underperformers also display short-run persistence. Hot hands persists in 1988 and 1989. \nThe success of the hot hands strategy does not derive from selecting superior funds over the sample period. The timing component -- knowing when to pick which fund -- is significant. These results are robust to alternative equity portfolio benchmarks, such as those that account for firm-size effects and mean reversion in returns. Capitilizing on the hot hands phenomenon, an investor could have generated a significant, risk-adjusted excess return of 10% per year.
Keywords: mutual funds; performance persistence; hot hands phenomenon
JEL Codes: G11; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Past performance (G14) | Future performance (D29) |
| High performance in one period (C41) | Continued high performance in subsequent period (C41) |
| Hot hands (Y60) | Future returns (G17) |
| Underperformers (D29) | Short-run persistence (C41) |