RFS Advance Access originally published online on April 13, 2009
Review of Financial Studies 2009 22(11):4553-4599; doi:10.1093/rfs/hhp016
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Benchmarking Money Manager Performance: Issues and Evidence
University of Illinois at Urbana-Champaign
Michigan State University
University of Illinois at Urbana-Champaign
Send correspondence to Louis K. C. Chan, 340 Wohlers, 1206 South Sixth Street, Champaign, IL 61820, telephone: 217-3336391. E-mail: l-chan2{at}uiuc.edu.
JEL Classification: G11, G12, G14, G23
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Abstract |
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Academic and practitioner research evaluates portfolio performance using size and value/growth attributes or factors. We assess the merits of popular evaluation procedures based on matched-characteristic benchmark portfolios or time-series return regressions by applying them to a sample of active money managers and passive indexes. Estimated abnormal returns display large variation across approaches. The benchmarks typically used in academic research—attribute-matched portfolios from independent sorts, the three-factor time-series model, and cross-sectional regressions of returns on stock characteristics—track returns poorly. Some simple alterations improve the performance of these methods.
We thank Kent Daniel, Eugene Fama, Ravi Jagannathan, Jason Karceski, Matthew Spiegel (the editor), Bhaskaran Swaminathan, two anonymous referees, seminar participants at the Hong Kong University of Science and Technology, Kellogg Hedge Fund Conference at Northwestern University, National University of Singapore, and the University of Texas at Austin for comments, and John Diderich, James Owens, Menno Vermeulen, and Simon Zhang for assistance with data.