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Fake Alpha

54 Pages Posted: 18 Jan 2017 Last revised: 5 Jun 2017

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: April 30, 2017

Abstract

Why do investors entrust active mutual fund managers with large sums of money while receiving negative excess returns on average? Our explanation is that investors have a coarser information set than fund managers which leads them to systematically misinterpret managers' skill. When investors are unable to correctly quantify risk because they have no knowledge of factor investing on beyond-market-risk factors, Fake Alpha strategies based on factor investing look like skill from the investors' perspective. As running such strategies is relatively cheap for the managers, the investors' coarser information set misleads them to invest beyond the point of zero excess returns in equilibrium. We confirm our theory by analyzing the sample of US equity active managed mutual funds and find significant evidence of decreasing returns to scale at the fund level as well as negative excess returns to investors in equilibrium states.

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 (April 30, 2017). 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

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