This study provides formal theoretical evidence that constructions of fund alpha that are implemented using robust specifications of asset pricing models generate alpha estimates that are well defined. Regardless, the formal theoretical model shows fund alphas that are constructed with the...

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...