n Investment Analysts Journal - Mutual fund performance : a market efficiency perspective
|Article Title||Mutual fund performance : a market efficiency perspective|
|© Publisher:||Taylor & Francis|
|Journal||Investment Analysts Journal|
|Affiliations||1 Arabesque Asset Management Ltd, UK, 2 Vrije Universiteit Brussel, Belgium and 3 Katholieke Universiteit Leuven, Belgium|
|Publication Date||Jan 2016|
|Pages||1 - 15|
|Keyword(s)||Adaptive markets hypothesis, Mutual fund performance and Time-varying weak-form market efficiency|
ISI Social Science
This study reconciles existing literature on stock market efficiency and mutual fund performance by developing a framework to test whether fund managers are able to exploit market inefficiencies. We find a positive relationship between alpha and weak-form market efficiency. Most funds are unable to outperform the market systematically, although a few are able to exploit relatively inefficient markets. Top performing funds are characterised by a better management of downside risk in times of market distress, whilst simultaneously exploiting learning effects when markets return to equilibrium. By conditioning fund performance on the state of the underlying market, we propose a conditional alpha ratio, which helps to better understand fund performance and can improve the fund selection process for investors.
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