The (Large) Effect of Return Horizon on Fund Alpha

Authors

Hendrik Bessembinder, W.P. Carey School of BusinessFollow
Michael J. Cooper, University of Utah - David Eccles School of BusinessFollow
Feng Zhang, Southern Methodist University (SMU) - Finance DepartmentFollow

Publication Date

10-31-2023

Abstract

Alpha depends on the return measurement horizon, particularly as the horizon becomes long. We introduce a procedure to estimate long-horizon alphas from short-horizon returns. Among those sample mutual funds with positive alphas estimated from monthly returns, nearly half have negative alpha estimates when returns are measured at the ten-year horizon. Among sample funds with positive monthly alpha estimates and monthly beta estimates that exceed one, over 70% have negative alpha estimates at the decade horizon. Alphas estimated from short-horizon returns can be uninformative or misleading regarding fund performance for both active and passive investors over longer horizons.

Document Type

Article

Keywords

alpha, beta, investment horizon, fund performance

Disciplines

Finance

DOI

10.2139/ssrn.4096412

Source

SMU Cox: Finance (Topic)

Language

English