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ValueWalk, U of MD + SSRN: Mutual Fund Competition, Manager's Skill, & Alpha

ibartman
edited August 2015 in The Bullpen
Mutual Fund Competition, Managerial Skill, and Alpha Persistence
Gerard Hoberg, Nitin Kumar, and N. R. Prabhala | April 5, 2015

http://www.valuewalk.com/2015/08/seeking-alpha-less-competition-helps-beat-the-market-new-research
http://www.rhsmith.umd.edu/news/seeking-alpha-less-competition-helps-beat-market
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2422906
ABSTRACT

What economic forces limit mutual fund managers from generating consistent out-
performance?

We propose and test the hypothesis that competition from other funds catering to similar segments of investor demand limits alpha persistence. We make three contributions.
  1. We use spatial methods to identify the dynamic competition faced by funds.

  2. We develop a new measure of skill - the ability of a fund to beat its close rivals.

  3. We show that performance is persistent only when a fund faces less competition in its style space.
This new persistence is economically significant and lasts up to four quarters.
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