On the Use of Multifactor Models to Evaluate Mutual Fund Performance
January 2007
Research Paper
Published by
Rotterdam School of Management (RSM) Erasmus University, Erasmus Research Institute of Management (ERIM)
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We show that multifactor performance estimates for mutual funds suffer from systematic biases, and argue that these biases are a result of miscalculating the factor premiums. Because the factor proxies are based on hypothetical stock portfolios and do not incorporate transaction costs, trade impact, and trading restrictions, the factor premiums are either over- or underestimated. We argue that factor proxies based on mutual fund returns rather than stock returns provide better benchmarks to evaluate professional money managers.
Keywords
Automatically Extracted Terms
- return
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- premium
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