DeMiguel, VictorGil-Bazo, JavierNogales, Francisco J.Santos, André A.P.2025-02-042025-02-042023DeMiguel V, Gil-Bazo J, Nogales FJ, Santos AAP. Machine learning and fund characteristics help to select mutual funds with positive alpha. Journal of Financial Economics. 2023;150(3):103737. DOI: 10.1016/j.jfineco.2023.1037370304-405Xhttp://hdl.handle.net/10230/69473Machine-learning methods exploit fund characteristics to select tradable long-only portfolios of mutual funds that earn significant out-of-sample annual alphas of 2.4% net of all costs. The methods unveil interactions in the relation between fund characteristics and future performance. For instance, past performance is a particularly strong predictor of future performance for more active funds. Machine learning identifies managers whose skill is not sufficiently offset by diseconomies of scale, consistent with informational frictions preventing investors from identifying the outperforming funds. Our findings demonstrate that investors can benefit from active management, but only if they have access to sophisticated prediction methods.application/pdfeng© 2023 The Author(s). Published by Elsevier B.V. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).info:eu-repo/semantics/articlehttp://dx.doi.org/10.1016/j.jfineco.2023.103737Active asset managementMutual-fund performanceMutual-fund misallocationMachine learningTradable strategiesNonlinearities and interactionsinfo:eu-repo/semantics/openAccess