"Before taking over Alpha, Mark Carhart was an assistant professor of finance at the University of Southern California. He had studied under Eugene Fama, a founding father of the efficient-market theory, which says investors can't consistently beat the market. Carhart himself drew attention with a research paper warning investors against mutual funds with 'hot hands.' He wrote that his analysis of 1,892 funds over 32 years showed that high repeat returns had little to do with skill, and the winning streaks didn't last long anyway"and then:
"Goldman hired Carhart soon after his article appeared in the Journal of Finance, and put him and a fellow Ph.D. from the University of Chicago, Raymond Iwanowski, in charge of the fledgling Alpha. Trading on complex mathematical models, Alpha returned 21% a year in the ten years through 2005. Goldman put many of its private banking customers into the fund.Then, true to Carhart's theory, hot turned cold. Last year Alpha lost 9%. This year, thanks partly to bad bets on the yen and the Australian dollar, it's down 33%. Assets have fallen to $6 billion from $10 billion and are expected to fall by another 25% as investors bail out in the next few weeks."
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To quote from Mr. Carhart's 1997 paper, "On Persistence in Mutual Fund Performance": "Using a sample free of survivorship bias, I demonstrated that common factors in stock returns and investment expenses almost completely explain persistence in equity mutual funds' mean and risk-adjusted equity returns....The only significant persistence not explained is concentrated in strong underperformance by the worst-return mutual funds. The results do not support the existence of skilled or informed mutual fund portfolio managers."
We can never fault anyone for trying disprove themselves, can we?
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