A0768
Title: Rethinking mutual fund performance: From traditional alpha to achievable alpha
Authors: Alberto Martin-Utrera - Iowa State University (United States) [presenting]
Victor DeMiguel - London Business School (United Kingdom)
Raman Uppal - EDHEC Business School (United Kingdom)
Abstract: Mutual-fund performance is traditionally evaluated using alpha, which measures the utility gain of an unconstrained investor who has access to the fund in addition to the benchmark factors. It is proven that the utility gain of shortsale-constrained investors is instead measured by achievable alpha, estimated using only those factors with strictly positive weight in the shortsale-constrained benchmark-factor portfolio. Empirically, active-fund management is less valuable for constrained investors: While 57.42\% of funds have positive traditional gross alpha, only 30.77\% have positive achievable gross alpha for a benchmark containing eight Vanguard funds. Achievable alphas predict fund flows, particularly during market turmoil.
