[R-SIG-Finance] making sense of 100's of funds

Tobias Muhlhofer tmuhlhof at indiana.edu
Sun Aug 12 17:41:17 CEST 2007


Unless you are looking at index funds, you need to see whether your
funds produce alpha. To do this, pick a set of benchmarks according to
your fund's style and investment strategy, like Morningstar category
index or something like that (or perhaps just the general stock market
plus the two Fama-French factors), regress the fund's returns on the
benchmark returns, and see whether you have a significantly positive
intercept after fees. This is the best way of measuring systematic-risk
adjusted returns.

Being a finance academic (and therefore a cynic), and judging from my
own research, if benchmarked correctly, very few fund managers generate
positively significant alphas, and so I personally buy index funds for
whatever style I want to invest in, and there I choose the one with the
lowest expense ratio.


More information about the R-SIG-Finance mailing list