Ulf Herrmann
Ph.D. Student, University of Erlangen-Nürnberg, Germany.
Hendrik Scholz
Professor, University of Erlangen-Numberg, Germany.Short-Term Persistence in Hybrid Mutual Fund
Performance: The Role of Style Shifting Abilities
Our study analyzes the performance and short-term persistence of
hybrid mutual funds. We use Sharpe’s (1992) style analysis to
determine attribution returns of funds. Based on a daily return interval
we present an innovative approach to separate attribution returns into
stock selection and style shifting components. Our empirical study
employs quarterly measurement periods to analyze the performance of
520 hybrid mutual funds and to distinguish between stock selection and
style shifting performance. In this context we adjust our style shifting
measure by a passive component resulting from buy-and-hold
investment strategies. Doing so, we split up style shifting performance
into an active and a passive performance component which clearly
impacts the evaluation of style shifting activities of funds. Finally, we
test for persistence in fund performance by quarterly ranking funds into
deciles based on several performance criteria and by measuring the
respective parameters for these deciles during the successive quarter.
Results of our empirical study show that hybrid mutual funds i) as
a group do not outperform their passive benchmarks, ii) show a
significant discrepancy in the performance of the top- and bottom
deciles, iii) perform remarkably worse after adjusting for the mentioned
passive timing effect, and iv) demonstrate persistence in stock selection
performance but not in style shifting performance.
Our paper contributes to the relatively rare literature on hybrid
mutual funds. Contrary to the majority of studies employing Sharpe’s
(1992) methodology in performance analysis of funds we use daily fund
returns and thus measure fund performance on a comparable short
interval. Focusing on the components of attribution return provides an
innovative return-based approach to distinguish between stock
selection and style shifting performance.