MUTUAL FUND
PERFORMANCE AT
LONG HORIZONS (2023)
Hendrik Bessembinder a
Michael J. Cooper b
Feng Zhang
, MAIN IDEA
The authors make a simple but powerful point.
We usually evaluate mutual funds using average monthly returns, such as alpha or the Sharpe ratio.
But investors do not invest for one month. They invest for 10, 20, or 30 years (long horizons).
When we look at long-term compound returns, the picture changes completely.
As the investment horizon becomes longer, fewer funds beat the market.
Even funds with positive monthly alpha may underperform the market over the long run.
The distribution of long-term returns becomes highly positively skewed.
Over 30 years, investors in mutual funds accumulated $1.02 trillion less wealth compared to investing in SPY.
The key message is simple: The arithmetic average can mislead long-term investors.
, MOTIVATION
Most prior research evaluates mutual fund performance using average monthly returns and risk-
adjusted measures such as alpha.
This approach follows a long tradition in the literature on mutual fund performance, including
studies such as Jensen (1968), Fama and French (2010), and Carhart (1997).
These studies focus on expected returns and average abnormal performance.
However, investors do not experience average monthly returns.
They experience compound returns over many years.
Very few studies examine what happens to performance when returns are compounded over long
horizons such as 10, 20, or 30 years.
PERFORMANCE AT
LONG HORIZONS (2023)
Hendrik Bessembinder a
Michael J. Cooper b
Feng Zhang
, MAIN IDEA
The authors make a simple but powerful point.
We usually evaluate mutual funds using average monthly returns, such as alpha or the Sharpe ratio.
But investors do not invest for one month. They invest for 10, 20, or 30 years (long horizons).
When we look at long-term compound returns, the picture changes completely.
As the investment horizon becomes longer, fewer funds beat the market.
Even funds with positive monthly alpha may underperform the market over the long run.
The distribution of long-term returns becomes highly positively skewed.
Over 30 years, investors in mutual funds accumulated $1.02 trillion less wealth compared to investing in SPY.
The key message is simple: The arithmetic average can mislead long-term investors.
, MOTIVATION
Most prior research evaluates mutual fund performance using average monthly returns and risk-
adjusted measures such as alpha.
This approach follows a long tradition in the literature on mutual fund performance, including
studies such as Jensen (1968), Fama and French (2010), and Carhart (1997).
These studies focus on expected returns and average abnormal performance.
However, investors do not experience average monthly returns.
They experience compound returns over many years.
Very few studies examine what happens to performance when returns are compounded over long
horizons such as 10, 20, or 30 years.
