Prediction of actively managed fund alpha using stock market efficiency

Abstract

The decision for an investor between an actively managed and a passive index equity fund may seem marginal, but it can have a substantial impact on long-term returns. Prior research has examined whether informational efficiency affects investing and whether active fund excess return is attributed to fund manager luck or skill. To fill the research gap between these two avenues of research and provide a tool for an informed decision between funds, this thesis aims to ascertain whether stock market informational efficiency can be used to predict active fund alpha. This thesis uses two empirical models, which show that informational efficiency is a statistically significant predictor of fund returns, and it moderates the relationship between active fund alpha and the market risk premium. These findings fill the gap in the literature and provide a framework for investors to make a better-informed decision between equity funds.