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Mutual Fund Performance: An Approach to Identifying the Top Performing Funds

Two recent augmentations of standard factor models in the literature enable investors to compute benchmark-adjusted alphas (Angelidis et al., 2013) and peer-group adjusted alphas (Hunter et al., 2015). We show that by and large the funds placed in the top performance quartile using either one of these models do not produce statistically significantly higher Sharpe ratios than the funds in the bottom quartile one year ahead. However, we find that the joint predictive ability of these models is strong: using both models at the same time to select the winner funds produces statistically significantly superior Sharpe ratios one-year ahead.