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False Discoveries in UK Mutual Fund Performance
Author(s) -
Cuthbertson Keith,
Nitzsche Dirk,
O'Sullivan Niall
Publication year - 2012
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.2009.00536.x
Subject(s) - fund of funds , closed end fund , passive management , equity (law) , open end fund , global assets under management , stable value fund , commodity pool , business , false discovery rate , institutional investor , actuarial science , finance , economics , political science , corporate governance , biochemistry , chemistry , market liquidity , law , gene
We use a multiple hypothesis testing framework to estimate the false discovery rate (FDR) amongst UK equity mutual funds. Using all funds, we find a relatively high FDR for the best funds of 32.8% (at a 5% significance level), which implies that only around 3.7% of all funds truly outperform their benchmarks. For the worst funds the FDR is relatively small at 7.6% which results in 22% of funds which truly underperform their benchmarks. For different investment styles, this pattern of very few genuine winner funds is repeated for all companies, small companies and equity income funds. Forming portfolios of funds recursively for which the FDR is controlled at a ‘acceptable’ value, produces no performance persistence for positive alpha funds and weak evidence of persistence for negative alpha funds.