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When Opportunity Knocks: Cross-Sectional Return Dispersion and Active Fund Performance

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  • von Reibnitz, Anna

Abstract

Active opportunity in the market, measured by cross-sectional dispersion in stock returns, significantly influences fund performance. Active strategies have the greatest impact on returns during periods of high dispersion, when alpha produced by the most active funds significantly exceeds that produced in other months. The outperformance of the most relative to the least active funds is also concentrated in months of high dispersion. Deciding when to invest in active funds, therefore, can be as important to generating outperformance as deciding which funds to invest in. Switching between highly active and passive funds based on dispersion produces significant alpha of over 2.7% p.a. after fees. This paper adds a new dimension to understanding how active funds can be used to generate value, by combining identification of which managers have the greatest potential to outperform the market with insight into when the market is most conducive to outperformance.

Suggested Citation

  • von Reibnitz, Anna, 2017. "When Opportunity Knocks: Cross-Sectional Return Dispersion and Active Fund Performance," Critical Finance Review, now publishers, vol. 6(2), pages 303-356, September.
    • Handle: RePEc:now:jnlcfr:104.00000040
    DOI: 10.1561/104.00000040
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    Citations

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    Cited by:

    1. Loban, Lidia & Sarto, José Luis & Vicente, Luis, 2021. "Determinants of non-compliant equity funds with EU portfolio concentration limits," Journal of Multinational Financial Management, Elsevier, vol. 62(C).
    2. Cao, Ying & von Reibnitz, Anna & Warren, Geoffrey J., 2020. "Return dispersion and fund performance: Australia – The land of opportunity?," Pacific-Basin Finance Journal, Elsevier, vol. 60(C).
    3. Li, Zhiyong & Rao, Xiao, 2023. "Exploring the zoo of predictors for mutual fund performance in China," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).

    More about this item

    Keywords

    Mutual funds; Return dispersion; Active management;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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