City Research Online

Abstract

Fama-French (Carhart) alphas of passive indices should be zero, but recent evidence shows otherwise. Inaccuracies of factors in the performance measurement models have been put forward as the main reason for this. Some computationally intensive solutions to factor adjustment have been proposed, but are not applicable to all benchmark indices. We propose an optimisation algorithm that makes minor adjustments to the market, size, value and momentum factors to obtain zero alphas for any benchmark index. In the sample of 1281 active and 102 passive US equity mutual funds benchmarking against S&P500, our adjustment leads to augmentation of fund performance upwards in periods of index underperformance and downwards in periods of index outperformance. Overall, the adjusted alphas of both groups of funds are significantly negative, signalling poor performance. This is particularly pronounced for tracker funds, whose managers have not been successful in enhancing returns adequately to make-up for the costs involved in any of the sub-periods examined.

Publication Type:	Article
Additional Information:	Also available at SSRN: https://ssrn.com/abstract=2581737
Publisher Keywords:	Performance evaluation, non-zero benchmark alphas, optimisationalgorithm, Fama-French (Carhart) factor adjustmen
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School > Finance
Related URLs:	https://ssrn.com/abstract=2581737
SWORD Depositor:	Symplectic Administrator

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