Persistent Performance of Alpha in Evaluating and Predicting the Returns of Chinese Stock Mutual Funds

Abstract

Alpha has been examined to be a significant performance indicator for mutual funds. It was developed in 1968 by Jensen and was widely applied as a measure in the evaluation of mutual funds managers. It quantitatively show the gap between the model-based expected returns and the actual fund returns. In my research, I wonder whether the persistence of alpha for different portfolios exist. I apply three mutual fund performance evaluation models in this paper and calculate the alpha of mutual funds under each model. Then I rank the alpha of each fund and group them into four portfolios. I keep tracking the alpha and performance of each portfolio from January 2008 to July 2020, and find that the portfolio with the highest historical alpha keeps beating the other three portfolios while having the highest alpha. Although there are still some parts of the experiment that could be improved, the empirical results of my research show that the alpha seems to be a persistent indicator of the performance of Chinese mutual funds.