The Beta Anomaly and Mutual Fund Performance

Abstract

We find evidence for the beta anomaly in mutual fund performance. This anomaly is not accounted for in the standard four-factor framework, nor by the addition of a BAB factor to the benchmark model. We show how to extract the skill component of alpha that avoids the beta anomaly, which we call active alpha. Our procedure is useful regardless of the risk model investors use. Active alpha is persistent and associated with superior portfolio performance. We find that, while many investors use standard alpha to allocate capital, a subset of sophisticated investors allocate their money to funds with high active alpha.

Keywords: Performance evaluation, active alpha, beta anomaly, mutual fund

JEL Classification: G20, G23, G11