Academics Prof. Jonathan B. Berk from Stanford University Business School and Associate Prof. Jules H. van Binsbergen of the Wharton School at the University of Pennsylvania have undertaken a study that points out that the "search for alpha" mantra that hedge fund investors have long followed in assessing active fund managers is conceptually flawed. Their research, published as Stanford University Graduate School of Business Research Paper No. 15-37 shows that active managers do have skill in picking investments and create value in doing so. Berk and van Binsbergen note: "Active fund managers are skilled and, on average, have used their skill to generate about $3.2 million per year. Large cross-sectional differences in skill persist for as long as ten years. Investors recognize this skill and reward it by investing more capital in funds managed by better managers. These funds earn higher aggregate fees, and a strong positive correlation exists between current compensation and future performance." Value added is a more accurate measure of active managers skill than alpha In their research, Berk and van Binsbergen make it clear that "the correct measure" of managerial skill is value added... More