Control of Luck in Measuring Investment Fund Performance*

Abstract

This paper applies an efficient method for Korean investment funds that controls luck in fund performance measurement and classification. Unlike the case of US mutual funds, a large proportion of Korean investment funds are estimated to be skilled funds. Furthermore, the Korean investment fund industry does not show a conspicuous pattern of decline in the proportion of skilled funds over time as shown by its US counterpart. Other issues around fund performance measurement such as fund fees, efficient fund portfolio selection, and the choice of the asset pricing model are also addressed. Finally, we propose to measure fund performance on a relative basis.

Russian Mutual Funds: Skill vs. Luck

“…Our results differ from the results of Suh and Hong (2011) for the Korean market. We suppose that testing skill versus luck in emerging markets is a fruitful topic, because our results for emerging markets are similar to developed markets.…”

“…The number of skilled funds in Russia is very similar to developed markets, but differs from the Korean market. This is strange, because Russian market is supposed to be an emerging and the results should be closer to Suh and Hong (2011).…”

“…These studies show that for developed markets true alpha in net returns is negative for most active funds, even for funds with high positive alpha estimates for their histories. For emerging markets the number of studies is much less, and the results are different: Suh and Hong (2011) shows that a large proportion of Korean equity investment funds (60%) are estimated to be skilled funds.…”

Is Money Smart When Funds are Young?

“…Our results, however, show that alphas are basically unchanged between the three‐factor and four‐factor models with Korean data. The finding that the momentum factor is insignificant in explaining fund performance is also consistent with Suh and Hong (), who study the performance of actively managed Korean funds from 2000 to 2009.…”

“…The finding, however, is consistent with previous studies on Korean equity funds. Suh and Hong () find that the average fund portfolios in their sample produce positive and statistically significant alphas of 3.2%. Cho and Shin (), who study a sample of Korean funds from 2002 to 2008, present the result that the alphas for fund portfolios in their sample is estimated to be about 3% with t‐statistics of around 1.0.…”