We evaluate the relative performance of funds by conditioning their returns on the cross-section of portfolio characteristics across fund managers. Our implied procedure circumvents the need to specify benchmark returns or peer funds. Instead, fund-specific benchmarks for measuring selection and market timing ability are constructed. This technique is robust to herding as well as window dressing and mitigates survivorship bias. Empirically, the conditional information contained in portfolio weights defined by industry sectors, assets, and geographical regions is important to the assessment of fund management. For each set of portfolio characteristics, we identify funds with success at either selecting securities or timing-the-market.
Hogan, S., & Warachka, M. (2008). Implied measures of relative fund performance. Financial Markets and Portfolio Management, 22, 47–66. https://doi.org/10.1007/s11408-007-0070-6