What does fund performance persistence hypothesis suggest about fund managers?

• A. They do not provide higher returns than the market
• B. They tend to repeat performance trends across different time periods
• C. They manage risk poorly, resulting in lower fund returns
• D. They typically experience performance decline over time

Answer: (B)

The fund performance persistence hypothesis posits that fund managers who achieve strong performance in one time period are likely to continue exhibiting similar performance trends in subsequent periods. This means that if a fund manager outperforms the market, they are likely to continue outperforming in the future, as their investment strategies or skill set may contribute to sustained success.

This hypothesis is rooted in the idea that certain managers possess skills or adhere to particular strategies that can lead to consistently superior returns, rather than those results occurring by chance or due to market fluctuations. Acknowledging performance persistence implies that investors can identify and allocate more capital to fund managers who demonstrate a pattern of successful performance over multiple periods.

In contrast, the other options suggest various challenges or shortcomings of fund managers that do not align with the persistence hypothesis. For instance, the notion that managers do not provide higher returns than the market, manage risk poorly, or experience performance decline over time reflects a more pessimistic view of fund management performance rather than recognizing the potential for consistency in successful outcomes.