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
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 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) |