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 on stock returns provide better benchmarks to evaluate professional money managers.

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doi.org/10.1111/j.1755-053X.2009.01029.x, hdl.handle.net/1765/19481
ERIM Top-Core Articles
Financial Management
Erasmus Research Institute of Management

Huij, J., & Verbeek, M. (2009). On the Use of Multifactor Models to Evaluate Mutual Fund Performance. Financial Management, 38(1), 75–102. doi:10.1111/j.1755-053X.2009.01029.x