Critical Finance Review > Vol 6 > Issue 2

When Opportunity Knocks: Cross-Sectional Return Dispersion and Active Fund Performance

Anna von Reibnitz, Australian National University, Australia,
Suggested Citation
Anna von Reibnitz (2017), "When Opportunity Knocks: Cross-Sectional Return Dispersion and Active Fund Performance", Critical Finance Review: Vol. 6: No. 2, pp 303-356.

Publication Date: 05 Sep 2017
© 2017 A. von Reibnitz
Mutual fundsReturn dispersionActive management


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In this article:
1. Measuring Dispersion, Fund Activeness and Performance 
2. Data and Sample Selection 
3. Fund Portfolio Performance Across Dispersion Environments 
4. Pervasiveness and Robustness Tests 
5. Investing in Funds Based on Return Dispersion and R2 
6. Conclusion 


Active opportunity in the market, measured by cross-sectional dispersion in stock returns, significantly influences fund performance. Active strategies have the greatest impact on returns during periods of high dispersion, when alpha produced by the most active funds significantly exceeds that produced in other months. The outperformance of the most relative to the least active funds is also concentrated in months of high dispersion. Deciding when to invest in active funds, therefore, can be as important to generating outperformance as deciding which funds to invest in. Switching between highly active and passive funds based on dispersion produces significant alpha of over 2.7% p.a. after fees. This paper adds a new dimension to understanding how active funds can be used to generate value, by combining identification of which managers have the greatest potential to outperform the market with insight into when the market is most conducive to outperformance.