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The (Large) Effect of Return Horizon on Fund Alpha

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  • Hendrik Bessembinder
  • Michael J. Cooper
  • Feng Zhang

Abstract

Alpha depends on the return measurement horizon, particularly as the horizon becomes long. We introduce a procedure to estimate long-horizon alphas from short-horizon returns. Among those sample mutual funds with positive alphas estimated from monthly returns, nearly half have negative alpha estimates when returns are measured at the 10-year horizon. Among sample funds with positive monthly alpha estimates and monthly beta estimates that exceed one, over 70% have negative alpha estimates at the decade horizon. Alphas estimated from short-horizon returns can be uninformative or misleading regarding fund performance for both active and passive investors over longer horizons.

Suggested Citation

  • Hendrik Bessembinder & Michael J. Cooper & Feng Zhang, 2025. "The (Large) Effect of Return Horizon on Fund Alpha," Critical Finance Review, now publishers, vol. 14(3), pages 389-424, July.
    • Handle: RePEc:now:jnlcfr:104.00000163
    DOI: 10.1561/104.00000163
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