Active Management and Mutual Fund Performance

This paper analyses the relationship between active management and performance in US equity mutual funds over the period 2001-2011 for both gross and net returns. Active management is measured by time-varying parameters, idiosyncratic risk and turnover. A U-shaped relation is found, thus both the best and the worst mutual funds show a higher level of active management. This behavior is also found in the relationship between expenses and performance. Active management therefore implies selecting different strategies or investment bets with higher expenses and an unequal performance is achieved. However some level of persistence in the success of these bets is only found for the best mutual funds