Forecasting Fund Manager Alphas: The Impossible Just Takes Longer

Posted: 20 May 2008

See all articles by M. Barton Waring

M. Barton Waring

Barclays Global Investors - Client Advisory Group

Sunder Ramkumar

affiliation not provided to SSRN

Abstract

Expected alpha from active fund managers can be forecasted - as long as one is mindful of the rules of the zero-sum game of investing. Explicit forecasts are preferred over implicit forecasts because sponsors can use explicit forecasts to build optimized portfolios of managers with improved manager weighting. To make explicit alpha forecasts, the investor combines two equations derived from the fundamental law of active management. The elemental variables for the equations are the sponsor's estimate of the manager's "goodness" at beating the manager's benchmark, the sponsor's assessment of the sponsor's skill in estimating manager ability, the cross-sectional standard deviation of manager skill, portfolio breadth, implementation efficiency, expected active risk of the portfolio, and fees.

Keywords: Performance Measurement and Evaluation, Manager Selection, Portfolio Management, Asset Allocation, Managing the Investment Process, Organization and Control, Investment Theory, Behavioral Finance

Suggested Citation

Waring, M. Barton and Ramkumar, Sunder, Forecasting Fund Manager Alphas: The Impossible Just Takes Longer. Financial Analysts Journal, Vol. 64, No. 2, 2008. Available at SSRN: https://ssrn.com/abstract=1135218

CFA Institute (Contact Author)

CFA Institute ( email )

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M. Barton Waring

Barclays Global Investors - Client Advisory Group ( email )

45 Fremont Street
San Francisco, CA 94105
United States

Sunder Ramkumar

affiliation not provided to SSRN ( email )

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