Double Adjusted Mutual Fund Performance

We develop a new approach for estimating mutual fund performance that controls for both factor model betas and stock characteristics in one measure. Our procedure shows that fund returns are significantly related to stock characteristics in the cross section after controlling for risk via factor models. The new measure substantially affects performance rankings, with a quarter of funds experiencing a change in percentile ranking greater than ten. Double-adjusted fund performance significantly predicts four-factor alpha, whereas the performance attributable to characteristics does not. Moreover, inference based on the new measure often differs, sometimes dramatically, from that based on traditional performance estimates.