Hot Hands in Mutual Funds: The Persistence of Performance, 1974-87
The net returns of no-load mutual growth funds exhibit a hot-hands phenomenon during 1974-87. When
performance is measured by Jensen's alpha, mutual funds that perform well in a one year evaluation period
continue to generate superior performance in the following year. Underperformers also display short-run persistence.
Hot hands persists in 1988 and 1989.
The success of the hot hands strategy does not derive from selecting superior funds over the sample period.
The timing component -- knowing when to pick which fund -- is significant. These results are robust to alternative
equity portfolio benchmarks, such as those that account for firm-size effects and mean reversion in returns.
Capitiling on the hot hands phenomenon, an investor could have generated a significant, risk-adjusted excess
return of 10% per year.
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