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The Beta Anomaly and Mutual Fund Performance

We find evidence for the beta anomaly in mutual fund performance. This anomaly is not accounted for in the standard four-factor framework, nor by the addition of a betting-against-beta factor to the benchmark model. We identify the active component of alpha (active alpha) not attributable to the passive effects related to beta. Active alpha is persistent and associated with superior portfolio performance. We find that, although many investors use standard alpha to allocate capital, a subset of sophisticated investors allocate their money based on active alpha. Our procedure is useful across the commonly used benchmark models for measuring performance and can be extended to accommodate other potential factor beta anomalies. This paper was accepted by Karl Diether, finance. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.4639 .