Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/162502
Title: 
Authors: 
Müller, Marcel
Rosenberger, Tobias
Uhrig-Homburg, Marliese
Year of Publication: 
2017
Series/Report no.: 
SFB 649 Discussion Paper 2017-001
Abstract: 
Why do investors entrust active mutual fund managers with large sums of money while receiving negative excess returns on average? Our explanation is that investors have a coarser information set than fund managers which leads them to systematically misinterpret managers' skill. When investors are unable to correctly quantify risk because they have no knowledge of factor investing on beyond-market-risk factors, Fake Alpha strategies based on factor investing look like skill from the investors' perspective. As running such strategies is relatively cheap for the managers, the investors' coarser information set misleads them to invest beyond the point of zero excess returns in equilibrium. We confirm our theory by analyzing the sample of US equity active managed mutual funds and find significant evidence of decreasing returns to scale at the fund level as well as negative excess returns to investors in equilibrium states.
Subjects: 
mutual funds
active management
managerial skill
alpha
JEL: 
G23
G11
G20
Document Type: 
Working Paper

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