Luck versus Skill in the Cross Section of Mutual Fund Returns: Reexamining the Evidence

While Kosowski et al. (2006, Journal of Finance 61, 2551-2595) and Fama and French (2010, Journal of Finance 65, 1915-1947) both evaluate whether mutual funds outperform, their conclusions are very different. We reconcile their findings. We show that the Fama-French method suffers from an undersampling problem that leads to a failure to reject the null hypothesis of zero alpha, even when some funds generate economically large risk-adjusted returns. In contrast, Kosowski et al. substantially overreject the null hypothesis, even when all funds have a zero alpha. We present a novel bootstrapping approach that should be useful to future researchers choosing between the two approaches.