Financ Mark Portf Manag (2018) 32:1–16
Long-term negative fund alpha: Is it caused by bad skill
or bad luck?
Published online: 19 January 2018
© Swiss Society for Financial Market Research 2018
Abstract This paper examines the sources of long-term negative fund alpha. We
compare the actual loser funds with a control group of bootstrapped loser funds. We
ﬁnd that the returns of the two fund groups are co-integrated, and that they are similar
in market risk exposure, alpha consistency, portfolio holdings, and GARCH volatility.
The test results show that long-term negative fund alpha occurs due to bad luck rather
than to bad skill.
Keywords Long-term negative alpha · Co-integration · Market exposure ·
Portfolio holdings · GARCH volatility
JEL Classiﬁcation G11 · G14
As a risk-adjusted performance measure, alpha is widely used to evaluate fund manager
skill. If a fund earns positive alpha, its manager is regarded as possessing superior skill
that enables him or her to beat the market. There is an abundant literature on whether
fund alpha exists and, if so, whether it is due to manager skill. Fund managers make
various decisions based on their judgment on the trade-off between risk and return.
Some of the decisions are correct; others may turn out to be wrong. What we want to
discover is whether those wrong decisions are due to bad skill or bad luck. This question
School of Business Administration, Pennsylvania State University-Harrisburg, Middletown,
PA 17057, USA