What You See May Not Be What You Get: Return Horizon and Investment Alpha

Authors: Hendrik Bessembinder, Michael J. Cooper, Feng Zhang

Abstract: Alpha depends on return measurement horizon, particularly as the horizon becomes long. We introduce a procedure to estimate long-horizon alphas from short-horizon returns, and find that among those mutual funds with positive alphas estimated from monthly returns, nearly a third have negative alpha estimates when returns are measured at the ten-year horizon. Among funds with positive monthly alpha estimates and monthly beta estimates that exceed one, over half have negative alpha estimates at the decade horizon. Alphas estimated from short-horizon (e.g. monthly) returns can be uninformative or misleading regarding fund performance for investors with longer horizons.