The Dynamics of Average Mutual Fund Alphas Diana P. Budiono, Martin Martens and Marno Verbeek * This version: December 5, 2009 Abstract The average alpha of mutual funds is an indication of whether it pays off to invest in actively managed funds. In this study we show that a substantial part of the variation in the average alpha can be explained by exogenous factors. The most important factors are the average expense ratio, the ratio between skilled and unskilled funds, and combining the average turnover ratio with the skill ratio and trading costs. The latter shows that average turnover hurts the average funds performance due to there not being enough skilled funds. JEL classifications: G11, G14, G19 Keywords: mutual funds, risk-adjusted returns, dynamics of alphas * Erasmus University Rotterdam, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands. E-mail addresses are budiono@ese.eur.nl, mmartens@ese.eur.nl and mverbeek@rsm.nl.