Distinguishing between skill and luck in the returns of Norwegian mutual funds

Abstract

Throughout this thesis we examine the risk adjusted performance of all actively managed Norwegian equity mutual funds, using a comprehensive dataset free of survivorship bias, spanning the period 1983 to 2015. We utilize a bootstrapping methodology which enables us to distinguish between skill and luck in the cross sectional distribution of mutual fund α estimates. A methodology of injecting alpha in the bootstrapping regressions is pursued to estimate the features of true α (defined as the skill to cover fees). After adjusting for luck, we find evidence that the top 5% of funds exhibit skills to earn 3.3% or more in annual alpha above the fees they charge,whereas the bottom 5% destroy at least 3.7% per year.