The Information Content of Aggregate Mutual Fund Alpha

62 Pages Posted: 19 Aug 2022

See all articles by Trevor Young

Trevor Young

Tulane University - A.B. Freeman School of Business

Date Written: August 14, 2022


Recent evidence shows that mutual funds collectively buy overvalued stocks. I hypothesize that aggregate mutual fund alpha partly arises from such stocks becoming even more overvalued and thus is a measure of market overvaluation. A one-standard-deviation increase in aggregate alpha corresponds to a 0.63 percentage-point decrease in the following month’s market return, and aggregate alpha yields a monthly out-of-sample R-squared of 2.79%. The predictability indeed stems from funds tilting toward overvalued stocks and small-cap or growth styles. Further consistent with overvaluation, higher aggregate alpha predicts higher anomaly returns and lower earnings surprises. The evidence is difficult to reconcile with rational explanations based on benchmarking, flow, or catering. My findings highlight a novel common component of time-varying fund performance and a new empirical fact about the usefulness of abnormal fund returns for understanding expected stock returns.

Keywords: alpha, mutual funds, information content, predictability, mispricing, behavioral finance

JEL Classification: G12, G14, G17, G23

Suggested Citation

Young, Trevor, The Information Content of Aggregate Mutual Fund Alpha (August 14, 2022). Available at SSRN: or

Trevor Young (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

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