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Comparing Equity Funds with Factor-Model Alphas

Article Quant Q&A · Author: NickF
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Summary

The discussion suggests comparing two value-oriented equity funds by estimating their risk-adjusted performance with a factor model, rather than relying only on standard return and risk summaries. The proposed approach regresses each fund’s returns on common factors such as the market, value, size, liquidity, and momentum, then compares the resulting alphas after fees.

The answer points to academic work as background, but provides no data, regression specification, or empirical findings. It also does not explain how to handle benchmark choices, changing exposures, estimation uncertainty, or the short monthly sample described in the question. The method can help distinguish returns associated with broad factor exposures from residual performance, but its conclusions depend on the chosen factors and model assumptions.

Key ideas

  • Factor regressions can help compare funds after accounting for systematic exposures.
  • The suggested factors include market, value, size, liquidity, and momentum.
  • The proposed comparison focuses on estimated alpha after fees.
  • Alpha estimates depend on model choice and the available return history.

Tags

EquitiesFactor investingStatistics
Full text
# Comparing Equity Funds


# Comparing Equity Funds












I am trying to compare 2 equity funds, I have 10Y of monthly returns (no knowledge of their share allocations) - and their index benchmark returns.

They are both Value managers but I am not looking for qualitative comparisons. Are there any clever/interesting ways of going about doing this comparison that you may know of, aside from showing the usual YTD, MTD, 1Y,2Y returns and Sharpe ratio, drawdowns,...

-Thanks

## Answer by phdstudent (score 3, accepted)

https://quant.stackexchange.com/a/19055

Most literature focus on comparing fund returns using a model alpha. A good overview is: Cahart (1997) and Berk and Binsbergen (2015). Basically you regress the fund returns on most common used factors (market return, HML, SMB, Liquidity and Momentum factors) and compare alphas after fees.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.