Luck versus skill: an evaluation of mutual funds in Brazil

Abstract

ABSTRACT This study verifies if investment funds returns in Brazil come from fund managers’ ability or just the luck factor. We used the methodology of Fama and French, which concludes for the irrelevance of skill in the United States. To estimate the distribution of alphas that would be obtained by mere luck, were generated 10,000 simulated funds from random selection among the returns of actual funds each month. The comparison of the simulated alpha with the actual ones showed there is ability to generate positive abnormal returns, especially by managers of large funds.