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

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  • Darryll Hendricks
  • Jayendu Patel
  • Richard Zeckhauser

Abstract

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.

Suggested Citation

  • Darryll Hendricks & Jayendu Patel & Richard Zeckhauser, 1990. "Hot Hands in Mutual Funds: The Persistence of Performance, 1974-87," NBER Working Papers 3389, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3389
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    References listed on IDEAS

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    1. William F. Sharpe, 1965. "Mutual Fund Performance," The Journal of Business, University of Chicago Press, vol. 39, pages 119-119.
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    6. Henriksson, Roy D, 1984. "Market Timing and Mutual Fund Performance: An Empirical Investigation," The Journal of Business, University of Chicago Press, vol. 57(1), pages 73-96, January.
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    Cited by:

    1. John H. Cochrane, 1999. "New facts in finance," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 23(Q III), pages 36-58.
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    3. Roberto Casarin & Andrea Piva & Loriana Pelizzon, 2008. "Italian Equity Funds: Efficiency and Performance Persistence," The IUP Journal of Financial Economics, IUP Publications, vol. 0(1), pages 7-28, March.
    4. Gonzalo Rubio, 1993. "Performance measurement of managed portfolios: a survey," Investigaciones Economicas, Fundación SEPI, vol. 17(1), pages 3-41, January.

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