Template-Type:  ReDIF-Paper 1.0
Series:  Tinbergen Institute Discussion Papers
Creation-Date: 04/17/2019
Revision-Date: 05/30/2023
Number: 19-029/IV
Author-Name: Erik Kole
Author-Workplace-Name: Erasmus Universiteit Rotterdam
Author-Name: Reza Brink
Author-Workplace-Name: Erasmus Universiteit Rotterdam
Title: Constructing and Using Double-adjusted Alphas to Analyze Mutual Fund Performance
Abstract: We propose a new approach for estimating mutual fund performance controlling for
both factor exposure and characteristics. Motivated factor models’ failure to fully adjust
returns for anomalies, our hierarchical Bayesian model separates the true alpha from
the effect of stock characteristics. It is straightforward and improves the traditional
two-pass estimation. Our double-adjusted alphas produce a different ranking of mutual
funds than the traditional alphas. Consequently, evidence of persistence in performance
increases, the link between selectivity and alpha disappears, but fund flows are related to
the true alpha and not to characteristics. Concludingly, measuring true outperformance
is crucial for understanding skill.
Classification-JEL: C11, G11, G23
Keywords: Mutual fund performance, Double-adjusted performance, Firm characteristics, Hierarchical Bayes
File-Url: https://papers.tinbergen.nl/19029.pdf
File-Format:  application/pdf
File-Size: 1.302.245 bytes
Handle:  RePEc:tin:wpaper:20190029