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A comparison of machine‐learning classifiers for selecting money managers

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  • Robert S. Ludwig
  • Michael J. Piovoso

Abstract

Machine‐learning algorithms have performed well on noisy datasets that are typical of financial data. This paper compares the performance of three types of machine‐learning classifier for selecting money managers. Naïve Bayes, neural network and decision tree learners were applied to a dataset of US equity managers. Although other studies have suggested that the performance of classifiers appears to be highly dependent on the nature of the problem and the dataset, the learning algorithms each had similar predictive accuracy and all outperformed by a substantial margin simple manager selection rules that are typical of the ways in which money managers and mutual funds are selected by investors. The results indicate that machine learners can be used as a decision‐support aid to improve the selection of money managers. Copyright © 2005 John Wiley & Sons, Ltd.

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  • Robert S. Ludwig & Michael J. Piovoso, 2005. "A comparison of machine‐learning classifiers for selecting money managers," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 13(3), pages 151-164, July.
    • Handle: RePEc:wly:isacfm:v:13:y:2005:i:3:p:151-164
    DOI: 10.1002/isaf.262
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    References listed on IDEAS

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    1. Chen, Hsiu-Lang & Jegadeesh, Narasimhan & Wermers, Russ, 2000. "The Value of Active Mutual Fund Management: An Examination of the Stockholdings and Trades of Fund Managers," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(3), pages 343-368, September.
    2. Judith Chevalier & Glenn Ellison, 1999. "Are Some Mutual Fund Managers Better Than Others? Cross‐Sectional Patterns in Behavior and Performance," Journal of Finance, American Finance Association, vol. 54(3), pages 875-899, June.
    3. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    4. Carl Ackermann & Richard McEnally & David Ravenscraft, 1999. "The Performance of Hedge Funds: Risk, Return, and Incentives," Journal of Finance, American Finance Association, vol. 54(3), pages 833-874, June.
    5. Detzel, F. Larry & Weigand, Robert A., 1998. "Explaining Persistence in Mutual Fund Performance," Financial Services Review, Elsevier, vol. 7(1), pages 45-55.
    6. Liang, Bing, 2000. "Hedge Funds: The Living and the Dead," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(3), pages 309-326, September.
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