Last updated:
The factor framework that turned 90% of "alpha" into "style tilts."
Fama-French 3 and 5-factor models extend CAPM by adding additional sources of systematic risk: size (small-cap premium), value (high book-to-market premium), and in the 5-factor version, profitability and investment. After fitting these factors, residual alpha is small for almost all active funds — most apparent skill was actually style tilt.
Rp − Rf = α + βMKT·MKT + βSMB·SMB + βHML·HML [+ βRMW·RMW + βCMA·CMA] + εRp − Rf = α + βMKT·MKT + βSMB·SMB + βHML·HML [+ βRMW·RMW + βCMA·CMA] + εMultivariate regression of portfolio excess returns on the factor return series. The intercept is the true alpha; the coefficients are your loadings on each factor.
The empirical insight: a small-cap value fund that "beat the S&P 500" by 3% per year may have zero alpha after Fama-French — its outperformance came entirely from systematic small-cap and value tilts that anyone could have replicated with cheap factor ETFs.
This is the framework that demolished most active management. After Fama-French, the residual alpha for most "skilled" managers shrinks to near zero. The skill was simply being on the right side of size and value factors.
Your active small-cap value fund returned 14% in a year. S&P 500: 10%. T-bills: 4%.
Naive CAPM alpha vs. S&P 500: +4%.
Fama-French 3-factor regression: βMKT=1.0 (10% × 1.0 = 10%), βSMB=0.6 (size factor returned +3% × 0.6 = 1.8%), βHML=0.4 (value factor returned +2% × 0.4 = 0.8%).
Predicted: 4% + 10% + 1.8% + 0.8% = 16.6%
Actual: 14%. Fama-French alpha = 14% − 16.6% = −2.6%
The "outperformance" was actually underperformance after adjusting for size and value tilts.
Statistically significant positive Fama-French alpha is extraordinarily rare. Most "great" managers have near-zero or modestly negative FF alpha. Anything sustained above +2% over a decade is exceptional.
3-factor = market + size + value. 5-factor = adds profitability (RMW) and investment (CMA). The 5-factor model better explains the cross-section of average returns.
CAPM treats all non-market exposure as alpha. Fama-French recognizes that size and value are systematic risk factors that can be passively captured, so it strips them out of "alpha."
Yes — alongside CAPM alpha. The gap between them shows how much "skill" was actually style tilt.
Foliolytic uses Ken French's data library, updated monthly.
Upload your brokerage CSV — Foliolytic computes Fama-French 3/5-factor plus 70+ other metrics using real historical prices, real Treasury yields, and real CPI data. Free, no signup, your data stays in your browser.
Analyze your portfolio free →