Which hypothesis proposes that fund managers offer excess returns over non-overlapping time periods?

Which hypothesis proposes that fund managers offer excess returns over non-overlapping time periods?

• A. Market efficiency hypothesis
• B. Fund performance regression hypothesis
• C. Fund performance persistence hypothesis
• D. Market return hypothesis

Answer: (C)

The fund performance persistence hypothesis is the correct choice because it specifically addresses the tendency of some fund managers to generate excess returns consistently over non-overlapping time periods. This hypothesis suggests that if a manager has outperformed the market in the past, it's likely that they may continue to do so in the future, demonstrating a level of skill in their investment strategy rather than attributing such performance to luck. This hypothesis is particularly important in the field of alternative investments and asset management because it challenges the notion of randomness in fund performance. The ability to identify skilled managers who can produce consistent excess returns is vital for investors seeking to optimize their portfolios. In contrast, the market efficiency hypothesis posits that all available information is reflected in asset prices and that it is impossible to consistently achieve excess returns. The fund performance regression hypothesis is not a commonly used term and lacks the specific focus on performance continuity over time periods that the fund performance persistence hypothesis emphasizes. The market return hypothesis broadly refers to the relationship between expected returns and market movements without delving into manager skill or performance consistency. Thus, the emphasis on the ability of certain fund managers to generate excess returns over multiple periods is what distinctly aligns with the fund performance persistence hypothesis.

The fund performance persistence hypothesis is the correct choice because it specifically addresses the tendency of some fund managers to generate excess returns consistently over non-overlapping time periods. This hypothesis suggests that if a manager has outperformed the market in the past, it's likely that they may continue to do so in the future, demonstrating a level of skill in their investment strategy rather than attributing such performance to luck.

This hypothesis is particularly important in the field of alternative investments and asset management because it challenges the notion of randomness in fund performance. The ability to identify skilled managers who can produce consistent excess returns is vital for investors seeking to optimize their portfolios.

In contrast, the market efficiency hypothesis posits that all available information is reflected in asset prices and that it is impossible to consistently achieve excess returns. The fund performance regression hypothesis is not a commonly used term and lacks the specific focus on performance continuity over time periods that the fund performance persistence hypothesis emphasizes. The market return hypothesis broadly refers to the relationship between expected returns and market movements without delving into manager skill or performance consistency.

Thus, the emphasis on the ability of certain fund managers to generate excess returns over multiple periods is what distinctly aligns with the fund performance persistence hypothesis.