Performance Evaluation, Factor Models, and Portfolio Strategies: Evidence from Chinese Mutual Funds

Abstract

Actively managed stock mutual funds in the Chinese A-share market offer good investment opportunities. In aggregate, they outperform stock market indexes. Individual funds show a wide cross-sectional dispersion in performance, with the best funds offering economically large risk-adjusted returns that persist over time. Performance persistence observed at the individual fund level is robust to various factor-model specifications. A portfolio of the top-performing funds offers an improved investment opportunity compared to a portfolio of all funds. Hedging out market risk in this portfolio increases the Sharpe ratio, lowers volatility, and reduces tail risk. These results suggest that, in the young and still-developing Chinese A-share market, mutual funds can add value for investors.