In pursuit of alpha: Evaluating active and passive strategies

Vanguard / Other

08-11-2017

We examine the gross and net alphas of active and index U.S. equity mutual funds and exchange-traded funds, both dead and alive, over the past 12 years on a four-factor-adjusted basis in order to empirically test the zero-sum-game theory.  

We find that the average fund does not generate positive gross alpha on either an equal-weighted or asset-weighted basis. The average fund generates negative net alpha on both an equal- and asset-weighted basis.  

Using multivariate regression, we find that higher portfolio turnover is associated with lower gross alphas and that there is no evidence of year-over-year persistence of outperformance among fund managers. Critically, we find that there is no difference in these findings between active and index funds, suggesting that fund characteristics are more important than the active and index labels.  