56 Pages Posted: 18 Jan 2017 Last revised: 6 May 2020
Date Written: May 5, 2020
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: Suggested Citation