Cross-Sectional Alpha Dispersion and Performance Evaluation

70 Pages Posted: 24 Mar 2018 Last revised: 14 Jan 2019

See all articles by Campbell R. Harvey

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Yan Liu

Purdue University

Date Written: January 13, 2019


Our paper explores the link between cross-sectional fund return dispersion and performance evaluation. The foundation of our model is the simple intuition that in periods of high return dispersion, which is associated with high levels of idiosyncratic risk for zero-alpha funds, it is easier for unskilled managers to disguise themselves as skilled. Rational investors should be more skeptical and apply larger discounts to reported performance in high dispersion environments. Our empirical results are consistent with this prediction. Using fund flow data, we show that a one-standard deviation increase in cross-sectional return dispersion is associated with an 11% to 17% decline in flow-performance sensitivity. The effect is stronger for recent data and among outperforming funds.

Keywords: Alpha, Investor behavior, Hedge funds, Mutual funds, Performance evaluation, Portfolio management, Risk, Type I errors, Type II errors, Bayesian decision-making, Appraisal ratio, Flow-performance sensitivity, Idiosyncratic risk

JEL Classification: G11, G14, G23

Suggested Citation

Harvey, Campbell R. and Liu, Yan, Cross-Sectional Alpha Dispersion and Performance Evaluation (January 13, 2019). Mays Business School Research Paper No. 3143806, Available at SSRN: or

Campbell R. Harvey

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)


National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yan Liu (Contact Author)

Purdue University ( email )

West Lafayette, IN 47907-1310
United States


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