When Trading Detracts From Alpha

As explained in my latest book, “The Incredible Shrinking Alpha,” which I co-authored with Andrew Berkin, accompanying the rapid growth of the actively managed mutual fund industry, the average performance of mutual funds has been trending downward over the past few decades.

Teodor Dyakov, Hao Jiang and Marno Verbeek—authors of the study “The Trading Performance of Active Mutual Funds,” which appears in the August 2015 issue of The Journal of Financial and Quantitative Analysis—found that, in using the Carhart four-factor model (beta, size, value and momentum), the annualized abnormal return on the aggregate U.S. equity mutual fund portfolio was 1.7% during the period 1981 through 1990, but declined to 0.86% during the period 1991 through 2000, and to -0.75% during the period 2001 through 2010.

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