Good investing paper on mutual funds and alpha

[NajdorfDefense]

http://papers.ssrn.com/sol3/papers.c...ract_id=891728

Abstract:
This paper uses disclosed mutual fund portfolio holdings to develop stock selection models. Our models aggregate portfolio holdings across mutual funds, weighted by their past performance, to predict future stock returns -- an overweighting by successful managers, or an underweighting by unsuccessful managers is considered to be a signal that a stock is currently underpriced. We find that investment strategies based on our stock signals generate [stock alpha] returns exceeding seven percent during the following year, adjusted for the size, book-to-market, and momentum characteristics of the stocks.

This evidence suggests that some managers have superior stock-selection skills, and that these skills strongly persist. Further, returns generated from our mutual fund holding-based strategies have a low correlation with those of 12 quantitative investment signals that are based on prior-documented market anomalies. Thus, our stock selection signals are unique, and indicate that some fund managers possess private skills that are unrelated to known anomalies.