Unmapped Holdings and the Performance Measurement of U.S. Equity Mutual Funds

This paper investigates a dataset that provides information about assets heldby U.S. equity mutual funds, but are not U.S. equities (`unmapped holdings'). Ishow the widespread presence of these assets and investigate how they are usedwithin mutual fund portfolios. I find that their effects are statistically significantupon both portfolio risk and return. They can either hedge or complement mappedasset returns. I show that predictability of mutual fund returns are reduced whenunmapped holdings returns are controlled. Since unmapped holdings returns are notobservable, I define an econometric technique that in chapter two that can controlfor their effect. This technique uses an average return (an `endogenous benchmark')to control for common but immeasurable or unobservable characteristics in a groupof funds. I find that an `endogenous benchmark' alone produces estimates nearly asgood as those using common risk factor regression models. By combining an endoge-nous bechmark with other risk factors in regression models, I find that estimatesare improved.