FUND MANAGERS MAY CAUSE THEIR BENCHMARKS TO BE PRICED “RISKS”

Michael Stutzer

The presence of a positive intercept (“alpha”) in a regression of an investment fund’s excess returns on a broad market portfolio’s excess return (as in the CAPM), and other “factor” portfolios’ excess returns (e.g. the Fama and French factors) is frequently interpreted as evidence of superior fund performance. This paper theoretically and empirically supports the notion that the additional factors may proxy for benchmark portfolios that fund managers try to beat, rather than proxying for state variables of future risks that investors (in conventional theory) are supposed to care about.