Performance Evaluation and Attribution of Security Portfolios

Chapter 6

Performance Evaluation of Non-Normal Portfolios

Abstract

This chapter presents an advanced approach to computing the statistical significance of the estimated performance of a fund manager—the “bootstrap approach”. A bootstrap approach is necessary because the cross-section of most managed fund alphas (such as those of a group of ranked mutual funds or hedge funds) has a complex nonnormal distribution due to heterogeneous risk-taking by funds as well as nonnormalities in individual fund alpha distributions. To illustrate the approach, this chapter applies this bootstrap to examine the performance of the U.S. open-end, domestic equity mutual fund industry over the 1975 to 2002 period. The bootstrap approach uncovers findings that differ ...