Volatility and mutual fund manager skill

In a standard four-factor framework, mutual fund return volatility is a reliable, persistent, and powerful predictor of future abnormal returns. However, the abnormal returns are eliminated by the addition of a “vol” anomaly factor contrasting returns on portfolios of low and high volatility stocks. Consistent with Novy-Marx (2014) and Fama and French (2014), the Fama and French (2015) profitability and investment factors are equally effective at eliminating the abnormal returns. Failure to account for the vol anomaly, either directly or indirectly, can lead to substantial mismeasurement of fund manager skill.