Beyond Alpha: A Comparative Study of Mutual Fund Performance Across Market Cycles

Abstract

Performance dynamics in mutual funds have long been assessed, first of all, in terms of alpha, excess returns realized over benchmark indices. But this type of unidimensional strategy tends to ignore the effects of market cycles, risk adjusted behavior and managerial persistence. This paper analyzes the variance of performance of a mutual fund under different market regimes, namely, expansionary, contractionary and volatile to determine if fund managers always create value in excess of alpha. Through a ten-year portfolio of diversified equity mutual funds, the analysis utilizes various performance measures such as Sharpe ratio, Treynor ratio, and Jensen alpha as well as the measures of downside risks to explain the dimension of returns and stability. Macroeconomic factors which identify market cycles include growth rates in GDP, volatility level, and standard performance levels. The findings show that some actively run funds may give statistically significant alpha in bullish market, however, the funds tend to perform poorly in bear markets when taking into account risk and transaction costs. Moreover, the sustainability of high performance between cycles is not high, which indicates that timing skill and consistency of style is important in high returns in the long term. The results emphasize the fact that alpha is not enough to analyze fund performance and that investors need to take into account cyclical resilience and consistency as essential performance measures. The study can be added to the current debate of market efficiency and the management of funds as it offers a more holistic view that might be applicable to the alpha generation and the macroeconomic cycles. This has implications in the asset management industry in terms of portfolio construction and investor decision making as well as policy design where it is advisable to move towards a dynamic cycle sensitive evaluation model.