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Machine-Learning the Skill of Mutual Fund Managers

Author

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  • Kaniel, Ron
  • Lin, Zihan
  • Pelger, Markus
  • Van Nieuwerburgh, Stijn

Abstract

We show, using machine learning, that fund characteristics can consistently differentiate high from low-performing mutual funds, before and after fees. The outperformance persists for more than three years. Fund momentum and fund flow are the most important predictors of future risk-adjusted fund performance, while characteristics of the stocks that funds hold are not predictive. Returns of predictive long-short portfolios are higher following a period of high sentiment. Our estimation with neural networks enables us to uncover novel and substantial interaction effects between sentiment and both fund flow and fund momentum.

Suggested Citation

  • Kaniel, Ron & Lin, Zihan & Pelger, Markus & Van Nieuwerburgh, Stijn, 2023. "Machine-Learning the Skill of Mutual Fund Managers," CEPR Discussion Papers 18129, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18129
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    Cited by:

    1. Jozef Barunik & Martin Hronec & Ondrej Tobek, 2024. "Predicting the distributions of stock returns around the globe in the era of big data and learning," Papers 2408.07497, arXiv.org.
    2. DeMiguel, Victor & Gil-Bazo, Javier & Nogales, Francisco J. & Santos, André A.P., 2023. "Machine learning and fund characteristics help to select mutual funds with positive alpha," Journal of Financial Economics, Elsevier, vol. 150(3).
    3. Damir Filipovi'c & Puneet Pasricha, 2022. "Empirical Asset Pricing via Ensemble Gaussian Process Regression," Papers 2212.01048, arXiv.org, revised Jan 2025.
    4. Ha, Yeonjeong & Oh, Haejune, 2024. "Choice for smart investment in mutual funds: Single- or multi-period performance ranks," Finance Research Letters, Elsevier, vol. 59(C).
    5. Hanauer, Matthias X. & Kalsbach, Tobias, 2023. "Machine learning and the cross-section of emerging market stock returns," Emerging Markets Review, Elsevier, vol. 55(C).
    6. Yizhan Shu & Chenyu Yu & John M. Mulvey, 2024. "Dynamic Asset Allocation with Asset-Specific Regime Forecasts," Papers 2406.09578, arXiv.org, revised Aug 2024.
    7. Li, Zhiyong & Rao, Xiao, 2023. "Exploring the zoo of predictors for mutual fund performance in China," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    8. Evangelos Liaras & Michail Nerantzidis & Antonios Alexandridis, 2024. "Machine learning in accounting and finance research: a literature review," Review of Quantitative Finance and Accounting, Springer, vol. 63(4), pages 1431-1471, November.

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    More about this item

    Keywords

    Mutual fund performance;

    JEL classification:

    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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