Alphas in Disguise: A New Approach to Uncovering Them

32 Pages Posted: 22 Mar 2015 Last revised: 29 Apr 2017

See all articles by V. L. Chinthalapati

V. L. Chinthalapati

University of Greenwich

Cesario Mateus

Aalborg University Business School

Natasa Todorovic

City University London - The Business School

Date Written: February 20, 2017


Fama-French/Carhart alphas of passive indices should be zero, but the recent empirical evidence shows otherwise. We propose an optimisation algorithm that makes minor adjustments to the time series for the market, size, value and momentum factors, which ensures zero alpha for a self-designated benchmark index of a mutual fund. The “adjusted factors” can then be used to estimate a fund’s adjusted alpha. We test this methodology on a sample of 1281 active funds and 102 tracker US equity mutual funds reporting S&P500 index as their prospectus benchmark. Our time series adjustment of the Fama-French-Carhart factors leads to an increase in a fund’s “adjusted alpha” in periods of fund benchmark underperformance and a decrease in periods of fund benchmark outperformance. Overall, our “adjusted alphas” of both active and tracker funds are significantly negative, signalling poor performance. This is particularly pronounced for tracker funds.

Keywords: Performance evaluation, non-zero benchmark alphas, optimisation algorithm, Fama-French (Carhart) factor adjustment

JEL Classification: G10, G11,C6

Suggested Citation

Chinthalapati, Venkata and Mateus, Cesario and Todorovic, Natasa, Alphas in Disguise: A New Approach to Uncovering Them (February 20, 2017). Available at SSRN: or

Venkata Chinthalapati

University of Greenwich ( email )

United Kingdom

Cesario Mateus (Contact Author)

Aalborg University Business School ( email )


Natasa Todorovic

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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