The Stock Market Fails to Outperform the Stock Market

Felix Salmon points to a study by Ken French and Eugene Fama showing that the returns of mutual funds are pretty evenly distributed. The tails are a bit fatter than the bell curve would suggest. The study also shows that fees basically eat up all the alpha. (This leads Matthew Yglesias to call the entire mutual fund industry “an elaborate fraud.”)
Felix writes:

For the vast majority of actively managed funds, true α is probably negative; that is, the fund managers do not have enough skill to produce risk adjusted expected returns that cover their costs.

Personally, I’m happy with some negative alpha out there because it means more for me. However, this study doesn’t impress me much because it looks at the fund industry as a whole. What the study shows is that the stock market doesn’t outperform the stock market. I can live with that. What would be more interesting is to see if the small group of active managers with positive alpha continues to have positive alpha. That’s the key.

Posted by on December 2nd, 2009 at 2:52 pm


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