Fake Alpha

56 Pages Posted: 18 Jan 2017 Last revised: 6 May 2020

See all articles by Marcel Müller

Marcel Müller

Karlsruhe Institute of Technology (KIT) - Institute for Finance

Tobias Rosenberger

Karlsruhe Institute of Technology (KIT) - Institute for Finance

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology (KIT) - Institute for Finance

Date Written: May 5, 2020

Abstract

We develop a model in which mutual fund investors chase CAPM alpha. Managers can generate CAPM alpha either by discovering mispricing – True Alpha – or by loading on risk factors that are beyond the scope of the CAPM – Fake Alpha. Investors cannot distinguish between the two different types of alpha and thus confuse Fake Alpha with True Alpha. We show that this confusion ex-post causes negative CAPM alpha in equilibrium states. Empirical results support our theoretical predictions: The average CAPM alpha is significantly negative, and retail funds with large loads of Fake Alpha provide investors significantly lower CAPM alpha than their peers.

Keywords: mutual funds, active management, managerial skill, alpha

JEL Classification: G11, G20, G23

Suggested Citation

Müller, Marcel and Rosenberger, Tobias and Uhrig-Homburg, Marliese, Fake Alpha (May 5, 2020). Available at SSRN: https://ssrn.com/abstract=2899722 or http://dx.doi.org/10.2139/ssrn.2899722

Marcel Müller (Contact Author)

Karlsruhe Institute of Technology (KIT) - Institute for Finance ( email )

P.O. Box 6980
D-76049 Karlsruhe, DE
Germany
+49 721 6084 8187 (Phone)
+49 721 6084 8190 (Fax)

HOME PAGE: http://derivate.fbv.kit.edu/english/Staff_1444.php

Tobias Rosenberger

Karlsruhe Institute of Technology (KIT) - Institute for Finance ( email )

P.O. Box 6980
D-76049 Karlsruhe, DE
Germany
+49 721 6084 8183 (Phone)
+49 721 6084 8190 (Fax)

HOME PAGE: http://derivate.fbv.kit.edu/english/Staff_1609.php

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology (KIT) - Institute for Finance ( email )

P.O. Box 6980
D-76049 Karlsruhe, DE
Germany
+49 721 6084 8183 (Phone)
+49 721 6084 8190 (Fax)

HOME PAGE: http://derivate.fbv.kit.edu/english/index.php

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
645
Abstract Views
6,975
rank
44,112
PlumX Metrics