Using a technique long employed by the medical profession in cancer and genetics research, Dirk Nitzsche and Keith Cuthbertson of Cass calculated the false discovery rate (FDR) for the UK mutual fund industry.
This reveals the funds that have outperformed through skill rather than good luck, or that underperformed through lack of skill rather than bad luck. The research found that over half (57 per cent) of funds that look like star performers turn out not to be.
The analysis of 675 funds found 236 of these exhibited outperformance, as measured by positive alpha. These were whittled down to a group of 21 that investors could be 95 per cent confident would produce positive alpha.
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