Ravi Bansal
Duke University, Durham, NC 27708, USA
Campbell R. Harvey
Duke University, Durham, NC 27708, USA
National Bureau of Economic Research, Cambridge, MA 02138, USA
Abstract
Fund managers are often evaluated against a set of benchmarks that only incorporate fixed-weight and/or buy-and-hold portfolio strategies. These metrics include the unconditional alpha measure of Jensen and graphical depictions of the unconditional mean-variance frontier. We develop a nonparametric benchmark to provide a new characterization of the risk exposure and risk-adjusted performance of fund portfolios. Importantly, this benchmark incorporates dynamic trading strategies based on publicly available information. Our empirical results show that the performance of mutual funds deteriorates using our benchmark. In addition, we show how to create positive alpha trading strategies. These out-of-sample strategies produce large abnormal returns -- when abnormal returns are defined by the unconditional capital asset pricing model.