Style chasing by hedge fund investors

This paper examines whether investors chase hedge fund investment styles. We find that better-performing and more popular styles are rewarded with higher inflows in subsequent periods. This indicates that investors compare hedge fund styles in terms of recent performance and popularity, and they subsequently reallocate funds from less successful to more successful styles. Furthermore, we find evidence of competition between individual hedge funds of the same style. Funds outperforming the other funds in their styles and funds whose inflows exceed the average flows in their styles experience higher inflows in subsequent periods. One of the reasons for competition among same-style funds is investors’ search for the best managers. The high minimum investment required to invest in a hedge fund limits investors’ diversification opportunities and makes this search particularly important. Finally, we show that hedge fund investors’ implementation of style chasing in combination with intra-style fund selection represents a smart strategy.     

Is trading behavior stable across contexts? Evidence from style and multi-style investors

In this paper we study priming of identity within the context of inherent vs. contextual financial decision making. We use a sample of individual trading accounts in equity-style funds taken from one fund family to test the hypothesis that trading styles are inherent vs. contextual. Our sample contains investors who invest either in a growth fund, a value fund, or both. We document behavioral differences between growth fund investors and value fund investors. We find that their trades depend on past returns in different ways: growth fund investors tend towards momentum trading and value fund investors tend towards contrarian trading. These differences may be due to inherent clientele characteristics, including beliefs about market prices, specific personality traits and cognitive strategies that cause them to self-select into one or the other style. We use a sample of investors that trade in both types of funds to test this proposition. Consistent with the contextual hypothesis, we find that investors who hold both types of funds trade growth fund shares differently than value fund shares.     

Herding by mutual funds: impact on performance and investors’ response†

In this paper we investigate whether herding by actively managed equity funds affects their performances and flows over the 1980–2013 period. We show that during the herding quarter, on average, funds that trade with the herd benefit from this behavior. Although this does not directly translate into a positive association between the extent to which funds herd and their subsequent performance, we find that the funds that follow the herd earn negative abnormal returns whereas the ones that lead earn no abnormal returns. Our results also indicate that investors react adversely to follower funds while they are neutral towards the leader funds.     

Effects of Market Segmentation and Bank Concentration on Mutual Fund Expenses and Returns: Evidence from Finland

A tremendous amount of research examines US mutual funds, but fund markets also thrive in other countries. However, research about these fast growing markets is lacking. This study addresses Finnish funds. Fast growth of the Finnish fund industry, strong bank dominance in the industry and recent EU membership make it an interesting market to examine. The Finnish fund market is also of particular interest since it had the fastest growth among the EU countries during 1996–2000. We find evidence that bank‐managed and older funds charge higher expenses but investors are not compensated for paying higher expenses with higher risk‐adjusted returns, suggesting a potential agency problem. Overall, Finnish fund expenses have decreased over time, consistent with EU membership reducing market segmentation and generating competition.     

Trends and determinants of Australian managed fund transaction costs

The present paper examines the often-overlooked managed fund fee that is incurred when investors enter and exit managed fund products. The present paper documents that transaction costs for investors, measured by the application-redemption spread, are above stock market brokerage rates although they have declined since 1995. The study analyses the relationship between this transaction fee and several variables. In summary, retail fund transaction costs are positively related to retail funds’ assets under management, whilst this relationship is negative for larger wholesale funds, consistent with economies of scale. Direct entry and exit fees and initial commissions are positively related to transaction costs which raises the possibility that the commissions are used to levy soft-dollar payments. The paper also documents a relationship between transaction costs and fund flows which differs between retail and wholesale funds. Overall, the findings are consistent with the proposition that the various fees are used by managers as interchangeable and the different fee regimes reflect different products and markets.     

Closed-End Fund Expenses and Investment Selection

Investment returns on closed‐end funds are highly volatile. Because expenses have a definite negative impact on closed‐end fund returns, investors should include the expense ratio as a criterion for fund selection in addition to performance, investment objective, and risk of the fund. This paper constructs a model of the expense ratio of closed‐end funds to explain cross‐sectional differences in the expense ratios for the period between 1989–1996. We relate closed‐end fund expenses to fund characteristics and identify the factors that can help investors choose low expense closed‐end funds.     

Purchase and redemption decisions of mutual fund investors and the role of fund families

This paper investigates the purchases and redemptions of a large cross-sectional sample of German equity funds. We find that investors not only punish bad performance by selling their shares, but also have a tendency to sell winners. Investors in large fund families show higher sales and redemption rates. Furthermore, family size also affects the flow-performance relationship: investors in large families punish bad performance more. Last, we find that inner family rankings play an important part for redemptions, with investors strongly redeeming their shares from intra-family losers. This result provides a potential reconciliation to the apparent contradiction between the low average holding period of mutual fund investors and the lack of investor discipline.     

Do prime brokers intermediate capital?

Prime brokers play an important role in intermediating arbitrage capital to hedge funds. A fund’s peer-group ranking, relative to funds that share the same prime broker, significantly affects how investors respond to its past performance. I decompose the standard performance-flow relationship into two components: (1) flows that respond to overall performance rank, and (2) flows that respond to relative (within prime broker) performance rank. Strong relative rank drives fund in-flows, while poor overall rank drives out-flows. These results suggest that prime brokers intermediate about 40% of the standard performance-flow relationship.     

How Informative Is Floating NAV When Securities Trade Infrequently?

We examine if a floating net asset value (NAV) increases the transparency of risk for investors. Using closed‐income fixed income funds we find little evidence that a floating NAV helps investors better understand the value and risk of a fund when a fund's assets trade infrequently. This potentially informs the debate regarding the adoption of a floating NAV in the money market industry. Our results suggest that it is unlikely that the benefits of floating NAV will outweigh the costs.     

Index portfolio and welfare analysis under heterogeneous beliefs

With a growing popularity of index funds, we adopt a differences-in-opinion, general equilibrium framework to examine theoretically whether investors are better off with an index portfolio than active investing. In contrary to the conventional view, we find that, even for an active investor with the most accurate belief, switching to an index portfolio can significantly improve his expected ex-post welfare when the active investors have incorrect beliefs or face incomplete information. Moreover, the welfare improvement becomes more substantial when the active investors are more risk averse.     

Investor risk evaluation in the determination of management incentives in the mutual fund industry

This paper examines the way in which investors evaluate risk in deciding which mutual funds to invest. New fund investment is found to be positively related to a distributed lag of past fund performance with a strong degree of inertia. The relationship is mostly linear with significant nonlinearities at the upper (and possibly the lower) end of the performance spectrum. Investors appear to use publicly available data in a way that is consistent with the theory, giving equal weight in their decisions to the return and market risk components of the performance measure, while ignoring diversifiable risk. Finally, it is shown that improved performance in any year has a significant impact on the earnings of the management company. Because managers are rewarded on the basis of risk adjusted returns, risk neutral managers have no incentive to manipulate risk, except at very high performance levels.     

Risk-taking and performance of government bond mutual funds

This paper investigates the risk exposures of government bond mutual funds and how risk-taking behavior affects fund performance. Government bond mutual funds often outperform their respective benchmark bond indexes before but not after adjusting for bond market risk factors. We show that the risk-taking behavior of fund managers helps to explain the different performances of government bond funds with and without controlling for the risk factors. Our results suggest that risk-taking leads to higher returns relative to benchmarks in normal risk periods but lower returns in high risk periods, suggesting that fund managers consistently take risky bets in fund management. We further show that the risk-taking of government bond funds is persistent and that investors typically have no ability to differentiate between the skill and risk components of fund performance. These findings suggest why fund managers have incentives to take consistently risky positions.     

Information spillovers and performance persistence for hedge funds

We present a simple model that rationalizes performance persistence in hedge fund limited partnerships. In contrast to the model for mutual funds of Berk and Green (2004), the learning in our model pertains to profitability associated with an innovative trading strategy or emerging sector, rather than ability specific to the fund manager. As a result of potential information spillovers, which would increase competition if informed investors were to partner with non-incumbent managers, incumbent managers will let informed investors benefit from increases in estimated profitability following high returns realized with the trading strategy or in the sector.     

On the characteristics and performance of long-short, market-neutral and bear mutual funds

We evaluate the return performance of long-short, market-neutral and bear mutual funds using multi-factor models and a conditional CAPM that allows for time-varying risk. Differences in the bearish posture of these mutual funds result in different performance characteristics. Returns to long-short mutual funds vary with the market, returns to market-neutral mutual funds are uncorrelated with the market and returns to bear mutual funds are negatively correlated. Using the conditional CAPM we document significant changes in the market-risk exposure of the most bearish of these funds during different economic climates. We then assess the flow-performance relationship for up to 60 months following up and down markets and find that investors direct flows towards market-neutral and bearish funds for several months after down markets. Market-neutral funds provide a down market hedge, but bear funds do not generate the returns that investors hope for.     

Life-cycle funds: Much Ado about Nothing?

The core idea of life-cycle funds or target-date funds is to decrease the fund's equity exposure and conversely increase its bond exposure towards the fund's target date. Such funds have been gaining significant market share and were recently set as default choice of asset allocation in numerous defined contribution schemes or related old-age provision products in several countries. Hence, an assessment of life-cycle funds’ risk-return profiles – that is, the probability distribution of returns – is essential for sustainable financial planning of a large group of investors. This paper studies the risk-return profile of life-cycle funds in particular compared to simple balanced or lifestyle funds that apply a constant equity portion throughout the fund's term instead. In a Black–Scholes model, we derive balanced funds that reproduce the risk-return profile of an arbitrary life-cycle fund for single and regular contributions. We then analyze the accuracy of our results under more complex asset models with stochastic interest rates, stochastic equity volatility and jumps. We further show that frequently used ‘rule of thumb approximations’ that only take into account the life-cycle fund's average equity portion are not suitable to approximate a life-cycle fund's risk-return profile. Our results on the one hand facilitate sustainable financial planning and on the other hand challenge the very existence of life-cycle funds since appropriately calibrated balanced funds can offer a similar (often dominating) risk-return profile.     

Gender,style diversity,and their effect on fund performance

This paper examines the performance of 358 European diversified equity mutual funds controlling for gender diversity. Fund performance is evaluated against funds’ designated market indices and representative style portfolios. Consistently with previous studies, proper statistical tests point to the absence of significant differences in performance and risk between female and male managed funds. However, perverse market timing manifests itself mainly in female managed funds and in the left tail of the returns distribution. Interestingly, at fund level there is evidence of significant overperformance that survives even after accounting for funds’ exposure to known risk factors. Employing a quantile regression approach reveals that fund performance is highly dependent on the selection of the specific quantile of the returns distribution; also, style consistency for male and female managers manifests itself across different quantiles. These results have important implications for fund management companies and for retail investors’ asset allocation strategies.     

The wisdom of crowds: Mutual fund investors’ aggregate asset allocation decisions

We find that the aggregate asset allocation decisions of US mutual fund investors depend on economic conditions. Both anticipated economic downturns and periods of turmoil lead investors to direct flow away from risky equity funds and towards lower-risk money market funds. These patterns are markedly stronger for investors in low cost and low turnover funds relative to investors in high cost and high turnover funds, consistent with sophisticated investors being more sensitive to changing conditions. Benchmarked against a buy-and-hold strategy, these asset allocation strategies reduce risk without degrading the risk-return trade-off. Our evidence suggests that individual investors, often dismissed as noise traders, collectively react to economic signals in a sensible manner when determining asset allocations.     

My global fund portfolio is not yours: the effect of home bias on European- and US-managed convertible bond fund exposures

This paper shows that global convertible bond funds (CBFs) and their resulting equity-bond exposures are regionally biased. Global bond fund managers display home bias, resulting in CBFs that are not only tilted towards the home market but also reflect the different bond-equity exposures of European and US convertibles. More specifically we find that global funds managed by a European asset management firm are more bond-like than global funds managed by a US-based asset manager. Hence, investors have to account for the asset management company's origin to avoid that the performance of the fund and its correlation with other assets is not in line with investor's ex ante expectations about globally managed portfolios. Our results also indicate that for investors of European-based CBFs this home bias has resulted in an ex post opportunity cost up to 1.38% per year, depending on the sample period.     

开放式基金的净值增长能力与证券市场收益的互动关系检验

随着证券投资基金规模的不断增大,基金已经成为我国证券市场上的重要机构投资者,其对证券市场的影响也日益深入。考察股票型开放式基金的净值增长能力及其与证券市场指数收益的互动关系,得出如下结论:(1)我国开放式基金的净值增长率高于市场收益;(2)在一个较长时期内,市场收益的变动是开放式基金净值增长率变动的格兰杰原因,但反过来并不成立;(3)开放式基金的净值增长能力和市场收益之间存在着一种长期的协整关系。     

Risk Transmission from Oil and Natural Gas Futures to Emerging Market Mutual Funds

This study evaluates the impacts of energy markets on emerging market mutual funds (EMMFs). In particular, we investigate the volatility transmission between these funds and the oil and natural gas prices. The findings suggest significant risk spillover from the energy markets to EMMFs. Furthermore, we find a large number of EMMFs’ risk transmitting to oil prices and almost all of the EMMFs’ risk transmitting to natural gas prices. By dividing the sample into two (before and after 2008), we find the EMMFs’ influence on the oil market decreasing after this turbulent period. Our results have important implications for mutual fund managers and investors.