A comparison of single factor and multiple factor alphas used in measuring mutual fund performance

Abstract

We compare mutual fund alphas computed using single factor models commonly used by practi­tioners with the alphas computed using the multifactor models common in academic research. Although all methods seek to control for a fund's investing style, single-factor alphas exceed multifactor alphas by 50-75 basis points per year on average, with the biggest differences concentrated in small cap funds. Although good performance does not tend to persist, single-factor alphas are about twice as likely to show persistence compared to three- and four-factor alphas. Investors should add multifactor alphas to the set of information used to evaluate mutual funds.