The (Large) Effect of Return Horizon on Fund Alpha

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


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.