Return Horizon and Mutual Fund Performance

63 Pages Posted: 24 Mar 2020 Last revised: 30 Apr 2021

See all articles by Hendrik Bessembinder

Hendrik Bessembinder

Arizona State University; W.P. Carey School of Business

Michael J. Cooper

University of Utah - David Eccles School of Business

Feng Zhang

University of Utah - Department of Finance

Date Written: April 29, 2021

Abstract

Measures of investment performance depend on the horizon over which returns are assessed. While 47% of U.S. equity mutual fund returns exceed matched-month SPY ETF returns, only 29% of the funds outperform the SPY in terms of compound returns over the full 1991-2018 sample period. Further, alpha, the canonical measure of mean return after allowing for systematic (beta) risk, depends on return horizon, and the effect of horizon is asymmetric in beta. Compared to a benchmark of 41% estimated in monthly returns, the percentage of mutual funds with positive alpha estimates against the SPY decreases to 21% (increases to 46%) at the decade return horizon for funds with high (low) estimated monthly market betas. The fact that alphas depend on the horizon over which returns are measured calls into question both the interpretation of short-return-horizon mutual fund alphas as a gauge of fund manager skill and short-return-horizon security alphas as the basis for tests of asset-pricing models.

JEL Classification: G10; G23

Suggested Citation

Bessembinder, Hendrik (Hank) and Cooper, Michael J. and Zhang, Feng, Return Horizon and Mutual Fund Performance (April 29, 2021). Available at SSRN: https://ssrn.com/abstract=3550284 or http://dx.doi.org/10.2139/ssrn.3550284

Hendrik (Hank) Bessembinder (Contact Author)

Arizona State University ( email )

PO Box 873906
Tempe, AZ 85207
United States

W.P. Carey School of Business ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

HOME PAGE: http://https://wpcarey.asu.edu/people/profile/2717225

Michael J. Cooper

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Feng Zhang

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112-9303
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
281
Abstract Views
1,513
rank
132,268
PlumX Metrics