Are Subjective Expectations Formed as in Rational Expectations Models of Active Management?

We recover forward-looking expected net-of-fee abnormal returns (alphas) for active equity mutual funds from analyst ratings. In contrast to the typical equilibrium implication of zero alphas, analyst alphas are negative for most funds, but positive for the largest funds. We compare analysts’ subjective expectations with expectations from a rational expectations learning model. The model’s rational learner believes that an increase in fund size leads to a decrease in returns, but we find no evidence that analysts believe so. Consistently, counterfactual ratings based on the rational model tend to outperform analysts’ ratings out of sample. Investor fund flows respond significantly to analyst ratings. This paper was accepted by Lukas Schmid, finance. Funding: Support from the Center for Big Data in Finance [Grant DNRF167], the Danish Finance Institute, and the Swedish House of Finance is gratefully acknowledged. This work was funded by Fundação para a Ciência e a Tecnologia (UIDB/00124/2025, UID/PRR/124/2025, Nova School of Business and Economics) and LISBOA2030 (DataLab2030 - LISBOA2030-FEDER-01314200). Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/mnsc.2024.04419 .