MUTUAL FUND’S NET ECONOMIC ALPHA: DEFINITION AND EVIDENCE

Sharon Garyn-Tal and Beni Lauterbach

It is sometimes argued that existing methodologies for assessing mutual fund’s performance are unfair, as fund’s return is taken net of expenses and benchmark return is gross of expenses. Examining over 1000 U.S. non-specialized mutual funds in 2001 2009, we find that the above-mentioned problem is minute—the net economic alpha, an alpha that accounts for the actual costs of investing in benchmarks via exchange-traded funds (ETFs), yields similar fund’s ranking and classification as the traditional methods. Also interesting is that the average net economic alpha is only slightly negative, suggesting that the mutual funds industry is not inferior.