The (Large) Effect of Return Horizon on Fund Alpha

Hendrik Bessembinder, Michael J. Cooper and Feng Zhang

Critical Finance Review, 2025, vol. 14, issue 3, 389-424

Abstract: Alpha depends on the return measurement horizon, particularly as the horizon becomes long. We introduce a procedure to estimate long-horizon alphas from short-horizon returns. Among those sample mutual funds with positive alphas estimated from monthly returns, nearly half have negative alpha estimates when returns are measured at the 10-year horizon. Among sample funds with positive monthly alpha estimates and monthly beta estimates that exceed one, over 70% have negative alpha estimates at the decade horizon. Alphas estimated from short-horizon returns can be uninformative or misleading regarding fund performance for both active and passive investors over longer horizons.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:now:jnlcfr:104.00000163

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