The Journal of Finance

Bayesian Alphas and Mutual Fund Persistence

Published: 09/19/2006   |   DOI: 10.1111/j.1540-6261.2006.01057.x

JEFFREY A. BUSSE, PAUL J. IRVINE

We use daily returns to compare the performance predictability of Bayesian estimates of mutual fund performance with standard frequentist measures. When the returns on passive nonbenchmark assets are correlated with fund holdings, incorporating histories of these returns produces a performance measure that predicts future performance better than standard measures do. Bayesian alphas based on the Capital Asset Pricing Model (CAPM) are particularly useful for predicting future standard CAPM alphas. Over our sample period, priors consistent with moderate to diffuse beliefs in managerial skill dominate more skeptical prior beliefs, a result that is consistent with investor cash flows.

On the Timing Ability of Mutual Fund Managers

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00356

Nicolas P. B. Bollen, Jeffrey A. Busse

Existing studies of mutual fund market timing analyze monthly returns and find little evidence of timing ability. We show that daily tests are more powerful and that mutual funds exhibit significant timing ability more often in daily tests than in monthly tests. We construct a set of synthetic fund returns in order to control for spurious results. The daily timing coefficients of the majority of funds are significantly different from their synthetic counterparts. These results suggest that mutual funds may possess more timing ability than previously documented.

Performance and Persistence in Institutional Investment Management

Published: 03/19/2010   |   DOI: 10.1111/j.1540-6261.2009.01550.x

JEFFREY A. BUSSE, AMIT GOYAL, SUNIL WAHAL

Using new, survivorship bias‐free data, we examine the performance and persistence in performance of 4,617 active domestic equity institutional products managed by 1,448 investment management firms between 1991 and 2008. Controlling for the Fama–French (1993) three factors and momentum, aggregate and average estimates of alphas are statistically indistinguishable from zero. Even though there is considerable heterogeneity in performance, there is only modest evidence of persistence in three‐factor models and little to none in four‐factor models.

Are Investors Rational? Choices among Index Funds

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00633.x

Edwin J. Elton, Martin J. Gruber, Jeffrey A. Busse

S&P 500 index funds represent one of the simplest vehicles for examining rational behavior. They hold virtually the same securities, yet their returns differ by more than 2 percent per year. Although the relative returns of alternative S&P 500 funds are easily predictable, the relationship between cash flows and performance is weaker than rational behavior would lead us to expect. We show that selecting funds based on low expenses or high past returns outperforms the portfolio of index funds selected by investors. Our results exemplify the fact that, in a market where arbitrage is not possible, dominated products can prosper.