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Where Has All the Alpha Gone?

The small group of money mangers who possess the ability to outperform the market has virtually disappeared, according to a new study, "False Discoveries in Mutual Fund Performance: Measuring Luck in Estimating Alphas," in which the researchers used a statistical test called the "False Discovery Rate" to measure money managers' capabilities in reading the market.

The research showed that the number of fund managers able to pass the False Discovery Rate test had decreased to 0.6%, a number that is statistically indistinguishable from 0.

The authors of this study-Laurent Barras, a visiting researcher from Imperial College's Tanaka Business School in London, Russ Wermers, a financial professor at the University of Maryland, and Olivier Scaillet, a financial econometrics professor at the University of Geneva and the Swiss Finance Institute-attribute this decline to the expenses and fees of managed funds, the rise of hedge funds and the leveling of the market through greater efficiencies. Also, many skilled managers have moved to the hedge fund industry.

In 2006, it was found that one in 10 managers had the ability to beat the market, but after taking fees and expenses into account, the average fell back to 0.6%.

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