Alpha and Performance Measurement: The Effects of Investor Disagreement and Heterogeneity

Working Paper: NBER ID: w19349

Authors: Wayne E. Ferson; Jerchern Lin

Abstract: The literature has not unambiguously established that a positive alpha, as traditionally measured, means that an investor would want to buy a fund. However, when alpha is defined using the client's marginal utility function, a client faced with a positive alpha would generally want to buy. When markets are incomplete performance measurement is inherently investor specific, and investors will disagree about the attractiveness of a given fund. We provide empirical bounds on the expected disagreement with a traditional alpha and study the cross sectional effects of disagreement and investor heterogeneity on the flow response to past fund alphas. The effects are both economically and statistically significant.

Keywords: Alpha; Performance Measurement; Investor Disagreement; Investor Heterogeneity

JEL Codes: G11


Causal Claims Network Graph

Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.


Causal Claims

CauseEffect
investor disagreement (G24)fund flows (F21)
investor heterogeneity (G11)fund flows (F21)
perceived alpha (C69)fund flows (F21)
traditional alpha (C69)fund flows (F21)
investor disagreement (G24)perceived alpha (C69)
fund performance (alpha) (G11)fund flows (F21)

Back to index