Getting Alpha the Hard Way

I’ve always enjoyed perusing the Dealbreaker website for their witty and often spot-on observations of our business. But they really hit the nail on the head with a recent article by Matt Levine on the difficulty of generating excess returns in mutual funds. 

The column begins with a look at a few academic studies on the subject. The first one compares the Morningstar mutual fund price database with the one compiled by the Center for Research in Security Prices, or CRSP (pronounced “crisp”) version, and found some intriguing and surprisingly large differences. It then introduces a concept called dollar value added, which is the gross return in excess of a benchmark (in this case a Vanguard index fund) multiplied by the assets under management. 

Not to ruin the ending, but suffice to say that gaining an edge by owning actively managed mutual funds is extremely difficult. I covered this topic in some detail in "Searching for Alpha." This article offers a succinct read for an subject important to all investors.

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