Should Investors Avoid All Actively Managed Mutual Funds? A Study in Bayesian Performance Evaluation

  1. Klaas P. Baks1,
  2. Andrew Metrick1,
  3. Jessica Wachter2

Article first published online: 17 DEC 2002

DOI: 10.1111/0022-1082.00319

Issue

The Journal of Finance

The Journal of Finance

Volume 56, Issue 1, pages 45–85, February 2001

Additional Information

How to Cite

Baks, K. P., Metrick, A. and Wachter, J. (2001), Should Investors Avoid All Actively Managed Mutual Funds? A Study in Bayesian Performance Evaluation. The Journal of Finance, 56: 45–85. doi: 10.1111/0022-1082.00319

Author Information

  1. 1

    Department of Finance, The Wharton School, University of Pennsylvania,

  2. 2

    Department of Finance, The Stern School, New York University

Publication History

  1. Issue published online: 17 DEC 2002
  2. Article first published online: 17 DEC 2002

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This paper analyzes mutual-fund performance from an investor's perspective. We study the portfolio-choice problem for a mean-variance investor choosing among a risk-free asset, index funds, and actively managed mutual funds. To solve this problem, we employ a Bayesian method of performance evaluation; a key innovation in our approach is the development of a flexible set of prior beliefs about managerial skill. We then apply our methodology to a sample of 1,437 mutual funds. We find that some extremely skeptical prior beliefs nevertheless lead to economically significant allocations to active managers.

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