The (Large) Effect of Return Horizon on Fund Alpha
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
