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Evaluating Mutual Fund Performance S.P. Kothari Jerold B. Warner* We thank Doug Breeden, Charles Nelson, Wayne Ferson, Bill Schwert, Cliff Smith, René Stulz, two anonymous referees, seminar participants (Rochester, Colorado (Burridge Center Annual Conference) and Duke) for their comments, and Andreas Gintschel, Peter Wysocki, and Tzachi Zach for excellent research assistance. We are grateful to the Research Foundation of the Institute of Chartered Financial Analysts and the Association for Investment Management and Research, the Bradley Policy Research Center at the Simon School, and the John M. Olin Foundation for financial support. S.P. Kothari acknowledges financial support from the New Economy Value Research Lab at the MIT Sloan School of Management. 2 Abstract We study standard mutual fund performance measures, using simulated funds whose characteristics mimic actual funds. We find that performance measures used in previous mutual fund research have little ability to detect economically large magnitudes (e.g., three percent per year) of abnormal fund performance, particularly if a fund’s style characteristics differ from those of the value-weighted market portfolio. Power can be substantially improved, however, using event study procedures that analyze a fund’s stock trades. These procedures are feasible using time-series datasets on mutual fund portfolio holdings. This paper uses simulation procedures to study empirical properties of performance measures for mutual funds (i.e., managed equity portfolios).