Why do investors entrust active mutual fund managers with large sums of money while receiving negative excess returns on average? Our explanation is that investors have a coarser information set than fund managers which leads them to systematically misinterpret managers' skill. When investors...

We develop a model in which mutual fund investors chase CAPM alpha. Managers can generate CAPM alpha either by discovering mispricing – True Alpha – or by loading on risk factors that are beyond the scope of the CAPM – Fake Alpha. Investors cannot distinguish between the two different...

Why do investors entrust active mutual fund managers with large sums of money while receiving negative excess returns on average? Our explanation is that investors have a coarser information set than fund managers which leads them to systematically misinterpret managers' skill. When investors...