Hot Hands in Mutual Funds: Short-Run Persistence of Relative Performance

The relative performance of no-load, growth-oriented mutual funds persists in the near term, with the strongest evidence for a one-year evaluation horizon. Portfolios of recent poor performers do significantly worse than standard benchmarks; those of recent top performers do better, though not significantly so. The difference in risk adjusted performance between the top and bottom octile portfolios is six to eight percent per year. These results are not attributable to known anomalies or survivorship bias. Investigations with a different data set and with some post-1988 data confirm the finding of persistence.

Main Result: Last year’s winners continue to perform well for one to eight more quarters. Last year’s losers continue to perform poorly. Persistence in poor performance is stronger than persistence in good performance.

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