Behind the Scenes of Mutual Fund Alpha

Abstract

This study examines whether fund alpha exists and whether it comes from manager skill. We found that the probability and the value of fund alpha vary depending on market states and fund styles. Overall, the funds with earned alpha do not exhibit a market-timing ability, though some of them show an ability to select stocks. We also used a sample of bootstrapped funds as the benchmark for funds without skill to explore the topic. Our test results suggest that fund alpha is resulted from pure luck instead of manager skill.