The Cross-Sectional Distribution of Fund Skill Measures

We develop a simple, non-parametric approach for estimating the entire distribution of skill. Our approach avoids the challenge of correctly specifying the distribution, and allows for a joint analysis of multiple measures---a key requirement for examining skill. Our results show that more than 85% of the funds are skilled at detecting profitable trades, but unskilled at overriding capacity constraints. Aggregating both skill dimensions using the value added, we find that around 70% of the funds are able to generate profits. The average value added after funds have reached their long-term size equals 7.1 mio. per year, which represents two thirds of the optimal value predicted by neoclassical theory. For all skill measures, the distribution is highly non-normal and reveals a strong heterogeneity across funds.