Regressed on the market alone, Suryamandal's fund shows alpha of 0.8% a month (t = 2.9). Adding size and value factors gives alpha of 0.35% (t = 1.4), with loadings of 0.95 on the market, 0.6 on size and 0.4 on value. Where did the alpha go, and what does the fund really deliver?

Of the 0.80% monthly alpha, 0.45% was the fund's tilt to small and value stocks: 0.27% from size and 0.18% from value. What remains, 0.35% a month with a t-statistic of 1.4, is not significant; its 95% interval runs from -0.15% to 0.85%. The client is mainly buying a small-cap value tilt at a market beta of 0.95, which can be held far more cheaply than a 1.8% fee.

Imagine judging a cricket coach by how many runs the team scored, without noticing he only picked players from the strongest club in the state. Part of the result was the pool, not the coaching. Alpha is whatever return the model's factors cannot explain, so a model with fewer factors calls more of the return skill. The fund's average excess return is 1.37% a month. The market model explains 0.95 x 0.60 = 0.57% and leaves 0.80%. The three-factor model also credits 0.6 x 0.45 = 0.27% to size and 0.4 x 0.45 = 0.18% to value, and leaves 0.35%. The 0.45% that moved is the tilt's reward over these 60 months.

Read the standard errors, not just the point estimates. A t of 2.9 on 0.80 means a standard error of about 0.28; a t of 1.4 on 0.35 means about 0.25. The three-factor alpha's 95% interval, roughly -0.15% to 0.85% a month, includes zero, so 60 months cannot tell this fund's skill apart from none. That is not proof of no skill either: an alpha of 0.35% a month would be worth having if real, and with this much noise it would take roughly four times as many months to confirm it. The fair statement is that the record does not show it.

Read the loadings as a description. A market beta of 0.95, a size loading of 0.6 and a value loading of 0.4 describe a fund that holds smaller, cheaper companies than the index, which is a style, not a secret. Styles can be bought through low-cost index funds or rules-based products for a fraction of a 1.8% fee, so the question for the client is whether the 0.35% that might be skill is worth the fee gap. It also matters which way the style runs next: small and value premia vary for years at a time, and a fund that looked brilliant in a decade when small value led can look poor in one when it lags, with no change in the manager's skill.

State the limits. The factor returns used here are long-short portfolios before costs, which an investor cannot hold for free, so comparing the fund with them flatters the factors a little. Adding a momentum or quality factor could move the alpha again in either direction. The answer is conditional on the model, and the honest conclusion is that most of the market-model alpha was exposure the client could have bought more cheaply.