Mutual Funds: The Good, The Bad and the Ugly…

Retail Investing 28 Aug 2006

By: Noel Amenc, Edhec Business School
Published: April 14, 2006
 

Professor Noel Amenc of the Edhec Business School in France argues for a new way of measuring mutual funds based on alpha/beta seperation (a topic regularly promoted on this website).

Excerpts:

“With the development of independent distribution and so-called “open” architecture, the marketing success of mutual funds no longer only depends on the ability of their sales network to sell, but also on their financial performance.”

“Separating the alpha from the beta…This is the direction of the initiative taken by EDHEC and EuroPerformance, who have developed the first fund rating system that distinguishes the manager’s skill (alpha) from the return that is due to the good or bad prevailing situation. The latter corresponds to the premiums for the risk factors (betas) to which the funds are exposed.”

Note: Edhec has partnered with Europerformance to establish a new ranking system for mutual funds based on alpha – using factor analysis, rather than manager-defined benchmarks to define beta.

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