Analyzing monthly return data on more than 2500 unique . equity funds over the period 1984–2003, we show that the average return gap is close to zero. In particular, the equally weighted return gap for all mutual funds in our sample equals basis points per month, while the value- weighted return gap equals − basis points per month. These results indicate that the magnitude of unobserved actions is relatively small in the aggregate. Thus, fund managers’ trades in the aggregate create sufficient value to offset trading costs and other hidden costs of fund management. At the same time, we document a substantial cross-sectional variation in the return gap,.
