False discoveries in UK mutual fund performance
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Submitted Version
Date
2012-06
Authors
Cuthbertson, Keith
Nitzsche, Dirk
O'Sullivan, Niall
Journal Title
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Volume Title
Publisher
Blackwell Publishing Ltd
Published Version
Abstract
We use a multiple hypothesis testing framework to estimate the false discovery rate (FDR) amongst UK equity mutual funds. Using all funds, we find a relatively high FDR for the best funds of 32.8% (at a 5% significance level), which implies that only around 3.7% of all funds truly outperform their benchmarks. For the worst funds the FDR is relatively small at 7.6% which results in 22% of funds which truly underperform their benchmarks. For different investment styles, this pattern of very few genuine winner funds is repeated for all companies, small companies and equity income funds. Forming portfolios of funds recursively for which the FDR is controlled at a ‘acceptable’ value, produces no performance persistence for positive alpha funds and weak evidence of persistence for negative alpha funds.
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Keywords
Mutual fund performance , False discovery rate , C15 , G11 , C14
Citation
CUTHBERTSON, K., NITZSCHE, D. & O'SULLIVAN, N. 2012. False Discoveries in UK Mutual Fund Performance. European Financial Management, 18, 444-463. doi: 10.1111/j.1468-036X.2009.00536.x
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© 2010 Blackwell Publishing Ltd. This is the pre-peer reviewed version of the following article: CUTHBERTSON, K., NITZSCHE, D. & O'SULLIVAN, N. 2012. False Discoveries in UK Mutual Fund Performance. European Financial Management, 18, 444-463 which has been published in final form at http://dx.doi.org/10.1111/j.1468-036X.2009.00536.x