Skewness Consequences of Seeking Alpha

54 Pages Posted: 3 Jul 2015 Last revised: 13 May 2017

Kerry Back

Rice University - Jones Graduate School of Business and Department of Economics

Alan D. Crane

Rice University - Jesse H. Jones Graduate School of Business

Kevin Crotty

Rice University

Date Written: May 12, 2017

Abstract

Mutual funds seek alpha, but coskewness is also an important performance attribute. Alpha and coskewness relative to the market are negatively correlated in theory, so funds may generate undesirable coskewness in the pursuit of alpha. Empirically, the tradeoff exists for mutual funds and is driven by both average fund composition and other actions of managers. After alphas are adjusted for coskewness, fewer funds have significantly positive performance than one would expect by chance. Proxies for active management associated with positive alphas are also associated with undesirable coskewness. Money flows to funds with desirable coskewness.

Keywords: Performance evaluation, coskewness, skewness, mutual fund

JEL Classification: G11, G20, G23

Suggested Citation

Back, Kerry and Crane, Alan D. and Crotty, Kevin, Skewness Consequences of Seeking Alpha (May 12, 2017). Available at SSRN: https://ssrn.com/abstract=2625788 or http://dx.doi.org/10.2139/ssrn.2625788

Kerry Back

Rice University - Jones Graduate School of Business and Department of Economics ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Alan D. Crane

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Kevin Crotty (Contact Author)

Rice University ( email )

6100 Main Street
Houston, TX 77005-1892
United States

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