Critical Finance Review > Vol 14 > Issue 3

The (Large) Effect of Return Horizon on Fund Alpha

By Hendrik Bessembinder, Arizona State University, USA, hb@asu.edu | Michael J. Cooper, University of Utah, USA, mike.cooper@eccles.utah.edu | Feng Zhang, Southern Methodist University, USA, fengzhang@smu.edu

 
Suggested Citation
Hendrik Bessembinder, Michael J. Cooper and Feng Zhang (2025), "The (Large) Effect of Return Horizon on Fund Alpha", Critical Finance Review: Vol. 14: No. 3, pp 389-424. http://dx.doi.org/10.1561/104.00000163

Publication Date: 07 Jul 2025
© 2025 Hendrik Bessembinder, Michael J. Cooper, and Feng Zhang
 
Subjects
 
Keywords
G10G23
BetaAlphaInvestment horizonSimulations
 

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In this article:
1. Investment Horizon and the Role of Rebalancing 
2. Return Measurement Horizon and Alpha 
3. Data and a Validation of the Modified LL Method 
4. Long-Horizon Alpha and Beta Estimates 
5. Conclusions 
References 

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.

DOI:10.1561/104.00000163

Online Appendix | 104.00000163_app.pdf

This is the article’s accompanying appendix.

DOI: 10.1561/104.00000163_app