Expectations of Active Mutual Fund Performance

94 Pages Posted: 10 Feb 2020 Last revised: 22 Jul 2021

See all articles by Magnus Dahlquist

Magnus Dahlquist

Stockholm School of Economics; Swedish House of Finance

Markus Ibert

Board of Governors of the Federal Reserve System; Swedish House of Finance

Felix Wilke

Stockholm School of Economics; Swedish House of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2021

Abstract

We recover a forward-looking distribution of expected abnormal returns (alphas) for active equity mutual funds from analyst ratings and confront analysts' expectations with expectations from a rational expectations learning model. Analysts and the rational learner respond similarly to changes in perceived skill and fees, but analysts do not believe in a negative impact of fund size on fund returns. The absence of such decreasing returns to scale in analysts' expectations and the presence thereof in actual fund returns make it difficult to reconcile analysts' expectations with rational expectations, but can help explain the industry's size and its poor performance.

Keywords: Alpha, expectations formation, mutual funds

JEL Classification: G11, G12, G14, G23

Suggested Citation

Dahlquist, Magnus and Ibert, Markus and Wilke, Felix, Expectations of Active Mutual Fund Performance (July 1, 2021). Swedish House of Finance Research Paper No. 20-4, Available at SSRN: https://ssrn.com/abstract=3531272 or http://dx.doi.org/10.2139/ssrn.3531272

Magnus Dahlquist

Stockholm School of Economics ( email )

Drottninggatan 98
Stockholm, SE-111 60
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Markus Ibert (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Swedish House of Finance ( email )

Drottninggatan 98
Stockholm, 11160
Sweden

Felix Wilke

Stockholm School of Economics ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

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