Market crises and benchmark-adjusted fund alphas in a small market context

Abstract

This paper investigates the impact of using benchmark-adjusted alphas to assess the performance of small market mutual funds, investing in domestic and European equities. For the 2000-2020 period, our results show that fund benchmarks exhibit significantly negative alphas, which lead to an underestimation of mutual fund performance when employing standard models. As a result, benchmark-adjusted alphas are significantly higher than unadjusted alphas for both fund categories, though differences are larger for domestic than for European funds. We also find that the impact of the benchmark-adjustment procedure depends on market states. The domestic (European) benchmark exhibits considerably lower (higher) alphas during crisis than during non-crisis periods. During market crises, differences between pre- and post-adjustment alphas are statistically significant only for domestic funds, whereas during non-crisis periods both fund categories exhibit significant performance improvements. Our findings suggest that the benchmark-adjustment procedure has a higher impact when benchmark indices exhibit higher concentration.

Keywords

• Mutual fund performance
• Benchmark-adjusted alphas
• Market crises
• Multifactor models