How to profit from mutual fund performance persistence?

Abstract

This thesis demonstrates that mutual fund performance persistence can be profitably exploited with a simple investment strategy. Funds are invested based on the top decile of an ex-ante raw returns rank. Strategy was tested under diverse circumstances and in different fund categories. It is demonstrated that strategies with shorter estimation and rebalancing periods – up to 1 year and 6 months respectively – consistently outperform the respective benchmarks, reaching annualized returns and Sharpe ratios of up to 24.3% and 0.89 respectively. Results are robust across all fund categories with over 42% of the risk-adjusted results being statistically significant. Robustness was also confirmed in expansion and recession periods, with weaker results in the later. It was shown that with transaction costs strategy returns are partially eroded, being the shorter rebalancing strategies – 1 month - the most affected. However it is proved that under realistic circumstances the best performing strategies still outperform by far the respective benchmarks.

Date of Award	9 Jan 2012
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	José Faias (Supervisor)