Abstract
This paper examines managerial skill of U.S. equity mutual funds in the context of both abnormal return and risk. We recognize the role of fund life cycle and use different evaluation horizons to control for fund age and the overall state of the market. We find that a small percentage of equity funds can beat the market, and the percentage is overall higher than what the control group would predict. We find no evidence of persistence. We also document that the chance of underperformance is much higher than what we’d expect from our control group. Taking the risk return tradeoff into account, any performance advantage of actual funds over bootstrapped funds is correlated with tail risk, and a robustness check confirms this finding. Thus, the complete story of mutual fund alpha, should it exist, would not be complete without incorporating both risk and luck.
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