Measuring Thematic Funds Performance via an Approach Based on Observable and Latent Factors

ABSTRACT This paper investigates whether thematic equity funds deliver abnormal performance relative to conventional global equity funds. Using Fama‐French models augmented with latent factors, we estimate fund‐level alphas, and apply the false discovery rate methodology to an estimated three‐group mixture distribution, separating good, null and bad performing funds, distinguishing abnormal performance from luck. Thematic funds' alpha distribution meaningfully differs from that of non‐thematic funds, after adjusting for hidden exposures. We interpret alphas as measures of abnormal performance, rather than managerial skill. The findings suggest that thematic funds offer distinctive performance characteristics relative to traditional ones.