FOMC Meetings, Monetary Policy Uncertainty, and Mutual Fund Alpha

We examine the ability of mutual fund managers to generate a positive alpha in a consistent manner around the uncertainty‐generating Federal Open Market Committee (FOMC) meetings. The consistency of active equity mutual funds in generating a positive alpha over the successive FOMC announcements is positively related to future fund flows. This consistency is linked to the sensitivity of fund holdings (average uncertainty beta) to the monetary policy uncertainty related to the FED decisions. The uncertainty beta of mutual funds with respect to monetary policy uncertainty can predict both the investor flows and the future performance of the fund. Thus, the monetary policy uncertainty appears to be an important risk factor for funds, as investors redirect their capital to funds with the ability to hedge this risk and provide a positive risk‐adjusted return over the FOMC announcements.