Mutual fund performance: a market efficiency perspective

Published in: Investment Analysts Journal
Volume 45, issue 1, 2016 , pages: 1–15
DOI: 10.1080/10293523.2015.1125058
Author(s): Tim VerheydenArabesque Asset Management Ltd, United Kingdom, Lieven De MoorFaculty of Economic and Social Sciences and Solvay Business School, Belgium, Rosanne VanpéeFaculty of Economics and Business, KU Leuven Campus Brussel, Belgium


This study reconciles existing literature on stock market efficiency and mutual fund performance by developing a framework to test whether fund managers are able to exploit market inefficiencies. We find a positive relationship between alpha and weak-form market efficiency. Most funds are unable to outperform the market systematically, although a few are able to exploit relatively inefficient markets. Top performing funds are characterised by a better management of downside risk in times of market distress, whilst simultaneously exploiting learning effects when markets return to equilibrium. By conditioning fund performance on the state of the underlying market, we propose a conditional alpha ratio, which helps to better understand fund performance and can improve the fund selection process for investors.

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