Working Paper: NBER ID: w9359
Authors: Randolph Cohen; Joshua Coval; Lubo Pstor
Abstract: We develop a performance evaluation approach in which a fund manager's skill is judged by the extent to which his investment decisions resemble the decisions of managers with distinguished performance records. The proposed performance measures are estimated more precisely than standard measures, because they use historical returns and holdings of many funds to evaluate the performance of a single fund. According to one of our measures, funds with significantly positive ability considerably outnumber funds with significantly negative ability at the end of our sample. Simulations demonstrate that our measures are particularly useful in ranking managers. In an application that relies on such ranking, we find only weak persistence in the performance of U.S. equity funds after accounting for momentum in stock returns.
Keywords: No keywords provided
JEL Codes: G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fund manager's skill inferred from alignment with successful managers' decisions (G11) | fund manager's performance (G11) |
| similar investment choices (G11) | similar performance outcomes (D29) |
| quality of investment decisions (G11) | overall fund performance (G23) |
| performance measures based on portfolio similarities (G11) | capture true skill effectively (J24) |
| funds with significantly positive ability outnumber those with negative ability (G41) | causal link between quality of investment decisions and overall fund performance (G11) |
| performance measures (C52) | ranking managers effectively (M54) |
| momentum in stock returns (G17) | persistence in performance (D29) |