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Seeking Alpha? Less Competition Helps Beat The Market: New Research

COLLEGE PARK, Md. (Aug. 12, 2015) –Three academics have developed a formula to predict mutual fund manager performance. It’s based on their finding that some fund managers beat the market based on how much competition they have: Less is better.

The findings are in the working paper Mutual Fund Competition, Managerial Skill and Alpha Persistence by professors Gerard Hoberg, University of Southern California’s Marshall School of Business; Nitin Kumar, Indian School of Business; and N.R. Prabhala, University of Maryland’s Robert H. Smith School of Business.

The researchers’ method, “peer alpha assessment,” relies on identifying the peers of a fund based on how similar their holdings are. This requires categorizing stocks based on such metrics as company size and book-to-market value.

The researchers examined 3,390 unique funds from 1980 through 2010. They re-analyzed peer groups quarterly, meaning that a given fund’s peers were constantly shifting (as fund size or strategy changed). Peers from the new methods overlap only partly with categories widely known to consumers, such as those used by Lipper.

Some funds had just a few dozen rivals while others had hundreds. Depending on the number of peers the funds had, the authors placed funds into high, medium and low competition...