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Abstract
Alpha and factor loadings differ in the assumed models for systematic risk and based on the estimation method. Using data on 1,312 US equity active mutual funds with $3.9 trillion in assets under management, the authors found that the estimated alphas are similar for commonly used regression-based factor models with combinations of value, size, quality, momentum, and low risk, but they differ significantly from results with holdings-based estimation methods. Holdings-based alpha measures are usually lower than measures with regression-based methods; can identify timing components that are largely positive, but modest, across managers; and are linked to systematic factor exposures. The authors found little evidence that certain areas of the market, such as small-capitalization stocks, offer more opportunities for alpha.
TOPICS: Mutual fund performance, performance measurement
Key Findings
• Using data on 1,312 US equity active mutual funds with $3.9 trillion in assets under management, the authors analyzed the alpha and factor loadings from traditional approaches using return regressions and bottom-up approaches using individual security holdings.
• Alphas produced by regression methods are similar, regardless of the factors chosen, but holdings-based alphas were generally lower than time-series estimates.
• Most of the positive performance of the best managers comes from static factor tilts, and a small but modest component is added by managers from timing factors. Dynamic alpha is strongly negatively related to momentum.
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