Performance evaluation with latent factors


We use the Confounder Adjusted Testing and Estimating (CATE) proposed in our previous paper to estimate the abnormal return (aka ‘alpha’) of U.S. equity mutual funds. When funds are ranked by the difference between CATE alpha and CAPM alpha, the top decile outperforms the bottom decile by 500 bps per year. We also find evidence that mutual fund flows become less responsive to FFC factors.

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