Hot Hands in Mutual Funds: The Persistence of Performance, 1974-87

Darryll Hendricks, Jayendu Patel, Richard Zeckhauser

NBER Working Paper No. 3389
Issued in June 1990
NBER Program(s):The Monetary Economics Program

The net returns of no-load mutual growth funds exhibit a hot-hands phenomenon during 1974-87. When performance is measured by Jensen's alpha, mutual funds that perform well in a one year evaluation period continue to generate superior performance in the following year. Underperformers also display short-run persistence. Hot hands persists in 1988 and 1989.

The success of the hot hands strategy does not derive from selecting superior funds over the sample period. The timing component -- knowing when to pick which fund -- is significant. These results are robust to alternative equity portfolio benchmarks, such as those that account for firm-size effects and mean reversion in returns. Capitilizing on the hot hands phenomenon, an investor could have generated a significant, risk-adjusted excess return of 10% per year.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w3389

Published: "Hot Hands in Mutual Funds: Short-Run Persistence of Performance, 1974-1988 ," Journal of Finance, vol 48, no 1, March 1993, pp 93-130.

Users who downloaded this paper also downloaded* these: