Abstract
The traditional fund-by-fund performance evaluation method suffers from various econometric problems such as multiple hypothesis testing, time-varying coefficients, cross-sectional dependence, etc. To overcome these problems, we tailor three high-dimensional cross-sectional tests to empirically evaluate the performance of both U.S. mutual funds and hedge funds, which yield results fundamentally different from the extant literature. For mutual (hedge) funds, we find about 5% (10%) on average with significant alphas, and more negative (positive) alphas than the positive (negative) alphas. The statistical significance of these fund alphas is too high to be explained by sheer luck. Interestingly, fund performance diverges during the late 2000s Global Financial Crisis. In addition, we find some (little) arbitrage opportunities among mutual (hedge) funds.
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