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Alpha vs Alpha: Selection, Timing, and Factor Exposures from Different Factor Models

Ananth Madhavan, Aleksander Sobczyk and Andrew Ang
The Journal of Portfolio Management Manager Fund Selection 2020, jpm.2020.1.142; DOI: https://doi.org/10.3905/jpm.2020.1.142
Ananth Madhavan
is managing director at BlackRock in San Francisco, CA
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Aleksander Sobczyk
is director at BlackRock in San Francisco, CA
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Andrew Ang
is managing director at BlackRock in New York, NY
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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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The Journal of Portfolio Management: 49 (3)
The Journal of Portfolio Management
Vol. 49, Issue 3
February 2023
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Alpha vs Alpha: Selection, Timing, and Factor Exposures from Different Factor Models
Ananth Madhavan, Aleksander Sobczyk, Andrew Ang
The Journal of Portfolio Management Feb 2020, jpm.2020.1.142; DOI: 10.3905/jpm.2020.1.142

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Alpha vs Alpha: Selection, Timing, and Factor Exposures from Different Factor Models
Ananth Madhavan, Aleksander Sobczyk, Andrew Ang
The Journal of Portfolio Management Feb 2020, jpm.2020.1.142; DOI: 10.3905/jpm.2020.1.142
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