TCU Neeley Research Highlights – Combining leadership experience, Neeley faculty influence industry and academic leaders through research findings.
January 31, 2024
TCU Neeley School of Business Paul Irvine, Kleinheinz Endowed Chair in International Finance and Investments and Rue Jen, associate professor alongside Jeong Ho Kim reveal through their study a specific type of performance, called active alpha, can explain some mutual funds' success better than traditional models. Unlike standard alpha, active alpha is linked to consistent, superior returns and is used by some investors to make smarter investment decisions. (Management Science, 2023).
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 betting-against-beta factor to the benchmark model. We identify the active component of alpha (active alpha) not attributable to the passive effects related to beta. Active alpha is persistent and associated with superior portfolio performance. We find that, although many investors use standard alpha to allocate capital, a subset of sophisticated investors allocate their money based on active alpha. Our procedure is useful across the commonly used benchmark models for measuring performance and can be extended to accommodate other potential factor beta anomalies.
