On the Use of Multifactor Models to Evaluate Mutual Fund Performance

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24 Citations (Scopus)

Abstract

We show that multifactor performance estimates for mutual funds suffer from systematic biases, and argue that these biases are a result of miscalculating the factor premiums. Because the factor proxies are based on hypothetical stock portfolios and do not incorporate transaction costs, trade impact, and trading restrictions, the factor premiums are either over- or underestimated. We argue that factor proxies based on mutual fund returns rather than stock returns provide better benchmarks to evaluate professional money managers.
Original languageEnglish
Pages (from-to)75-102
Number of pages28
JournalFinancial Management - FM
Volume38
Issue number1
DOIs
Publication statusPublished - 2009

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