"Hot Hands" in Bond Funds or Persistence in Bond Fund Performance
Abstract
In this study we investigate persistence in relative performance among 3,316 bond
mutual funds over the period 19902003. We show that bond funds that displayed
strong (weak) performance over the past period continue to do so in the future. The
out-of-sample difference in risk-adjusted return between the top and bottom decile
of funds ranked on past alpha amounts to more than 3.5 percent per annum. Topranked
managers of high quality funds have above average exposure to long-term
bonds, while top-ranked managers of high-yield funds take more non-systematic risk.
Using a simple strategy based on past performance only, we demonstrate that bond
fund investors can exploit the observed persistence pattern to earn abnormal returns.
Paper download www.eur.nl/fbk/dep/dep5/seminars More information: P. Roosenboom proosenboom@rsm.nl
