Fake Alpha

We develop a model in which mutual fund investors chase CAPM alpha. Managers can generate CAPM alpha either by discovering mispricing, True Alpha, or by loading on risk factors that are beyond the scope of the CAPM, Fake Alpha,. Investors cannot distinguish between the two different types of alpha and thus confuse Fake Alpha with True Alpha. We show that this confusion ex-post causes negative CAPM alpha in equilibrium states. Empirical results support our theoretical predictions. The average CAPM alpha is significantly negative, and retail funds with large loads of Fake Alpha provide investors significantly lower CAPM alpha than their peers.