Mathematical Sciences Department
Financial Math Seminar
Speaker: Shane Gao, WPI Business School
Monday, October 30, 2023
10:00am - 11:00am
Unity Hall 405
Title: Investing in Mutual Funds: Exploiting the Cross-sectional Predictability in Fund Performance
Abstract: We investigate the economic value generated by U.S. active equity mutual funds from the perspective of a utility-maximizing investor. The proposed optimal portfolio strategy, which jointly exploits the information conveyed by fund characteristics and by macroeconomic indicators about future fund performance, outperforms commonly used passive benchmarks as well as active strategies that exploit fund characteristics but without relying on the principles of portfolio theory. Our findings indicate that investing in active mutual funds can be value adding if investors: a) account for the predictability in performance originating from fund-level information; b) adopt an optimal portfolio approach, as opposed to simpler strategies based on sorting or equal-weighting.