Mutual funds performance evaluation based on endogenous benchmarks

This paper proposes two quadratic-constrained DEA models for evaluation of mutual funds performance, from a perspective of evaluation based on endogenous benchmarks. In comparison to previous studies, this paper decomposes two vital factors for mutual funds performance, i.e. risk and return, in order to define mutual funds' endogenous benchmarks and give insights and suggestions for managements. Of the two quadratic-constrained DEA models, one is a partly controllable quadratic-constrained programming. The approach is illustrated by a sample of twenty-five actual mutual funds operating in the Chinese market. It identifies the root reasons of inefficiency and ways for improving performance. The results show that although the market environment in year 2006 was much better than that in 2005, average efficiency score declines in year 2006 due to relaxing of system risk control. The majority of mutual funds do not show persistence in efficiency ranking. The most important conclusion is that the ranking of mutual funds in China depends mostly on system risk control. © 2010 Elsevier Ltd. All rights reserved.