Luck Versus Skill in the Cross Section of Mutual Fund Returns

In aggregate, mutual funds produce a portfolio close to the market portfolio but with high costs of active management that show up intact as lower returns. Persistence tests that sort funds on three-factor α estimates suggest information effects in the future returns of past winners and losers, but persistence is temporary, it is weak to nonexistent in sorts on average return, and it largely disappears after 1992. Bootstrap simulations that use entire histories of fund returns do not identify information effects in three-factor or four factor α estimates.