Authors of the Article
- Marcel Müller, Chair of Financial Engineering and Derivatives, Karlsruhe Institute of Technology (KIT)
- Tobias Rosenberger, Chair of Financial Engineering and Derivatives, Karlsruhe Institute of Technology (KIT)
- Marliese Uhrig-Homburg, Chair of Financial Engineering and Derivatives, Karlsruhe Institute of Technology (KIT)
- Investors misinterpret the skill of active funds managers, and thus tend to accept the negative aggregate returns provided by the active management funds industry
- In particular, investors fail to properly quantify the risks related to factor investing. Therefore they feel that these strategies deliver abnormal or extraordinary returns with respect to their risk profile. Hence they are baited by Fake Alpha strategies, for which they overpay
"Investors tremendously overinvest into active managed mutual equity funds. (...) We estimate that the US equity active mutual fund industry is too large by about 23% of its actual size. (...) This means that within 2014 $21.9 billion would have been falsely paid by investors of active managed US mutual funds to their managers."
"Investors would still provide flows to the funds in the long-run equilibrium even if the managers didn’t have any skill at all, since they confuse skill with risk premia on omitted factors"