Cross-Sectional Alpha Dispersion of Investment Funds and Performance Evaluation: Is There a Connection? (Evidence from an Emerging Market)

Eivazlu, Reza; Bajalan, Saeed; Mohammadi, Mohadeseh

doi:10.61186/ijf.2024.426420.1441

Cross-Sectional Alpha Dispersion of Investment Funds and Performance Evaluation: Is There a Connection? (Evidence from an Emerging Market)

Document Type : Original Article

Authors

Reza Eivazlu ¹

Saeed Bajalan ²

Mohadeseh Mohammadi ³

¹ Assistant Prof., Department of Markets and Financial Institutions, Faculty of Accounting and Financial Sciences, College of Management, University of Tehran, Tehran, Iran

² Assistant Prof., Department of Financial engineering, Faculty of Accounting and Financial Sciences, College of Management, University of Tehran, Tehran, Iran.

³ MSc, Department of Financial engineering, Faculty of Accounting and Financial Sciences, College of Management, University of Tehran, Tehran, Iran.

10.61186/ijf.2024.426420.1441

Abstract

The investment decisions of managers of investment funds (especially equity investment funds) have an impression on the returns of individuals who have deposited their capital in these funds. Therefore, the issue of evaluating the performance of investment funds and their managers is imperative for investors. The research aims to investigate the effect of cross-sectional alpha dispersion on investors' evaluation of the performance of investment funds. We extract data regarding 31 equity investment funds from 2012 till 2022 and calculate the interquartile ratio of Jensen's alpha called "IQR" and "Performance-Flow Sensitivity" along with control variables. Then, the hypothesis test model was fitted using the multivariate regression analysis using the Generalized Least Squares method. Empirical findings show a negative and significant connection between the alpha dispersion of investment funds and performance-flow sensitivity. Based on the results, one credit increase in the standard deviation of alpha dispersion leads to a decrease of about 0.4% in the ratio of performance-flow sensitivity. Environments with high alpha dispersion of investment funds will targeted by unskilled managers to introduce themselves as successful and skilled managers to investors and mislead them. Therefore, when the alpha of investment funds has a higher dispersion, the type I error possibility investors will face increases. Individuals may consider an inefficient manager to be competent and skilled. We will provide some suggestions in this regard.

Keywords

Investment Funds

Performance Evaluation

Bayesian Model

Jensen's Alpha

Behavioral Models

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