Mutual fund performance evaluation with active peer benchmarks

David Hunter, Eugene Kandel, Shmuel Kandel, Russ Wermers*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

56 Scopus citations


We propose a simple approach to account for commonalities in mutual fund strategies that relies solely on information on fund returns and investment objectives. Our approach augments commonly used factor models with an additional benchmark that represents an equal investment in all same-category funds, which we call an active peer benchmark (APB). We find that APBs substantially reduce the average time series correlation of residuals between individual funds within a group when added to a four-factor equity model (or to a seven-factor fixed-income model). Importantly, adding this APB significantly improves the selection of funds with future outperformance.

Original languageAmerican English
Pages (from-to)1-29
Number of pages29
JournalJournal of Financial Economics
Issue number1
StatePublished - Apr 2014

Bibliographical note

Funding Information:
Eugene Kandel, David Hunter, and Russ Wermers dedicate this paper to the memory of their valued friend and colleague, Shmuel Kandel, who inspired them and contributed mightily to this project. We gratefully acknowledge useful comments from Jacob Boudoukh, Martin Gruber, Charles Trzcinka, and an anonymous referee; suggestions from the participants of the Gerzensee Summer Finance Conference (2007); the Financial Economics Conference in Memory of Shmuel Kandel (2007, Tel Aviv University), and especially David Musto (the discussant); (2008, ISCTE Business School; Lisbon, Portugal) and especially Yufeng Han (the discussant); the Leading Lights in Fund Management Conference (2009, Cass Business School, London, UK) and especially Keith Cuthbertson (the discussant); the American Finance Association annual meetings (2010, Atlanta, Georgia) and especially Melvyn Teo (the discussant); the China International Conference in Finance (2011, Wuhan, Peoples Republic of China) and especially Jay Wang (the discussant); Sun Yat Sen University (2011); the Asian Finance Association annual meetings (2011, Macao, Peoples Republic of China) and especially Qi Zeng (the discussant), and the Wharton School at the University of Pennsylvania. We also gratefully acknowledge the receipt of the Gutmann Prize from the University of Vienna for an earlier version of this paper, and of the CFA Institute Best Paper Award from the 2011 Asian Finance Association annual meetings. Eugene Kandel and Shmuel Kandel benefited from financial support from the Israeli Science Foundation . Eugene Kandel would also like to thank the Krueger Center for Finance Research at Hebrew University for financial support.


  • Mutual funds
  • Performance measurement


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