S/ Mutual fund benchmark and alpha and beta

Alpha Funds

Numerous asset management firms offer mutual funds to the general public with different asset sizes, strategies and fees. As of 2013 there is around 1’400 mutual funds under Swiss rule  and are more or less 7’000 mutual funds from the U.S.A.(“2013 Investment Company Fact Book”)

All to say that there are a lot of financial products for the everyday man to get to know and therefore can be quite daunting to determine if a mutual funds is worth our attention and investment.

This is where some metrics can help us identify the different offers :

  • The Alpha coefficient is available to us to help assess the performance of the particular mutual fund that one is interested by. This measure determines if our mutual fund outperformed or underperformed the benchmark. Such benchmarks are financial indexes such as the S&P500, SMI (for Switzerland), or the Russell 3000.

If the Alpha is a negative value, the mutual fund underperformed that particular benchmark and a positive value is attributed to the fund  overperformed.

It is not always straight forward to determine if a mutual fund is particularly attractive, as alternative such as ETFs can outperform the mutual funds with less management’s fees.

  • The Beta coefficient is also a helpful value that provides complementary information about this type of financial product. This measure provides information about the volatility, a positive value indicating a volatile product.

But equally are many things, theses only touch the surface of other metrics such as the rate of return, management fees and even “load structures”. Any serious investor should take into account all theses factors while investing.

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