Flaw in the fund skill/luck test method of Cuthbertson et al

Nuttall, John (2007): Flaw in the fund skill/luck test method of Cuthbertson et al. Unpublished.

Abstract

Cuthbertson et al have recently described a method that is claimed to be able to identify individual fund managers who exhibited skill over a long period in the past. The only input to the process is monthly fund returns. We suggest that a critical step in the Cuthbertson method is flawed. This step involves the study of the order statistics of period average fund returns. We construct a simple model to which the Cuthbertson method should apply. Simulations with the model conclusively demonstrate that the method fails to detect many funds with skill, and also erroneously identifies many funds as having skill they do not possess.

• Item Type: MPRA Paper
• Institution: University of Western Ontario
• Language: English
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G20 - General

References

Cuthbertson, K., Nitzsche, D. and O'Sullivan, N., "Mutual Fund Performance: Skill or Luck?" Cass Business School Research Paper (2005) Available at SSRN: http://ssrn.com/abstract=665744

Daniel, K., and Titman, S., "Testing Factor-Model Explanations of Market Anomalies," Working paper (2005) http://www.kellogg.northwestern.edu/faculty/daniel/htm/

David, H., and Nagaraja, H., "Order Statistics," Third edition. Wiley (2003)

Kosowski, R., Timmermann, A., Wermers, R. and White, H., "Can Mutual Fund 'Stars' Really Pick Stocks? New Evidence from a Bootstrap Analysis". (2005) Available at SSRN: http://ssrn.com/abstract=855425