New Research on Performance Chasing
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
This article originally appeared on ETF.COM here.
There is a considerable body of evidence demonstrating that the post-hire performance of active managers tends to be disappointing relative to their pre-hire performance. Specifically, managers’ performance tends to regress toward zero after adjusting for expenses, risk, exposure to common factors and survivorship bias. For example, the research has found that:
- Mutual fund net inflows associated with retail investors are positively related to past performance. Mutual fund gross inflows follow positive performance, and gross outflows follow negative performance.
- Pension clients (institutional investors) withdraw assets from managers with poor past performance and increase flows to recent winners. Yet the managers fired go on to outperform the managers hired.
- While 20 years ago, about 20% of actively managed funds were generating statistically significant alpha, that figure is now about 2% as the market has become more efficient, the competition has gotten tougher and, as described in my book, “The Incredible Shrinking Alpha,” academics have been converting what was once alpha (a source of outperformance) into beta (a common factor that can easily be replicated).
- There is little evidence of performance persistence among hedge funds and actively managed mutual funds.