Are active fund managers collectors of private information or fast interpreters of public information?

Recent studies of fund manager performance find evidence of outperformance. However limited research exists as to whether such outperformance is because of privately collected information, or merely expedient interpretation of publicly released information. In this study, we examine the trade sequences of active Australian equity fund managers around earnings announcements to provide insights into the source of fund managers’ superior information. We document an increased occurrence of buy‐sell trade sequences around good‐news earnings announcements. The evidence is consistent with fund managers having both private information about forthcoming good‐news earnings announcements and being ‘short‐term profiteers’. We find no evidence that fund managers have private information about forthcoming bad‐news earnings announcements. However, we do find an increase in the frequency of fund managers not trading before bad‐news earnings announcements only to subsequently sell during announcements.     

Pay now or pay later? The economics within the private equity partnership

The economics of partnerships have been of enduring interest to economists, yet it is not clear what profit sharing within a private partnership should look like. We examine over 700 private equity partnerships and show that the allocation of fund economics to individual partners varies drastically, even among the most senior partners, and appears divorced from past success as an investor, being instead related to status as a founder. A smaller share of carried interest and ownership—and inequality in fund economics more generally—is associated with departures of senior partners which, in turn is negatively related to the funds’ ability to raise additional capital.     

Are hedge fund managers skilled?

This study measures the skill of hedge fund (HF) managers by calculating the value added that they extract from capital markets. Applying bootstrapping to control for luck, we find that HF managers are skilled, with the magnitude of the value added depending on the benchmark. Compared to the Vanguard S&P 500 Index Fund and a set of eight Vanguard index funds, HF managers add on average $3.24 million per year and $2.88 million per year, respectively, although these values were higher before the financial crisis of 2007–2008 than afterwards. Finally, we find no evidence that HF managers share this value added with their investors.     

What do mutual fund managers’ private portfolios tell us about their skills?

I study a registry-based dataset of Swedish mutual fund managers’ personal portfolios. The majority of managers do not invest personal wealth into the very same funds they professionally manage. The managers who do invest personal money into their funds subsequently outperform the managers who do not. The results suggest that fund managers, in contrast to regular investors, are certain about their ability to generate an abnormal return, or lack thereof, and invest their personal wealth accordingly.     

Why do fund managers increase risk?

This paper examines the relationship between the increase in fund risk and subsequent cash flows. We attempt to test the hypothesis that an increase in fund risk actually increases the net flows of equity funds, which is a basic assumption of risk shifting. We find that a change in fund risk has a positive and convex relationship with the fund's net flows. The effect of risk changes on net flows is a natural consequence of its effects on inflows and outflows. This paper's empirical results are robust to return frequency, fund age, and fund size. Our findings create incentives for managers to shift risk as documented in the mutual fund literature.     

What determines corporate pension fund risk-taking strategy?

Corporate sponsors of defined benefit pension plans generally assume low investment risk when they have low funding ratios and high default risk, consistent with the risk management hypothesis. However, for financially distressed sponsors and sponsors that freeze, terminate, or convert defined benefit to defined contribution plans, the risk-shifting incentive (moral hazard) dominates. Pension fund risk-taking is also affected by labor unionization and sponsor incentives to maximize tax benefits, restore financial slack, and justify the accounting choices of pension assumptions. Sponsors shift toward an aggressive risk strategy when their pension plans emerge from underfunding, bankruptcy risk is reduced, or marginal tax rate decreases. Overall, we show that corporate sponsors adopt a dynamic risk-taking strategy in their pension fund investments.     

When fund management skill is more valuable?

Does fund management skill allow managers to identify mispriced securities more accurately and thereby make better portfolio choices resulting in superior fund performance when noise trading – a natural setting to detect skill – is more prevalent? We find skilled fund managers with superior past performance to generate persistent excess risk‐adjusted returns and experience significant capital inflows, especially in high sentiment times, high stock dispersion, and economic expansion states when price signals are noisier. This pattern persists after we control for lucky bias, using the ‘false discovery rate’ approach, which permits disentangling manager ‘skill’ from ‘luck.’     

How skilful are US fixed-income fund managers?

We develop a performance evaluation model that incorporates the factors proposed by Huij and Derwall (2008) and a fund-specific benchmark to analyse the performance of US fixed income funds. Using the full sample, and accounting for the possibility of false discoveries, we find that fund management companies extract most of any abnormal performance produced by their fund managers. Our sub-sample analysis indicates that after the Global Financial Crisis (GFC) there was a substantial increase in the number of bond funds with: both positive gross-of-fee alpha and positive net-of-fee alpha performance; and also a reduction in funds with negative-alpha performance. However, because the GFC was such a unique event, it would still be difficult to conclude that these managers offer value for money for investors compared to passive alternatives.     

Do mutual fund managers time market liquidity?

This paper examines mutual fund managers' ability to time market-wide liquidity. Using the CRSP mutual fund database, we find strong evidence that over the 1974–2009 period, mutual fund managers demonstrate the ability to time market liquidity at both the portfolio level and the individual fund level. Liquidity timing predicts future fund performance and the difference in the risk-adjusted returns between top and bottom liquidity-timing funds is approximately 2% per year. Funds exhibiting liquidity-timing ability tend to have longer histories, higher expense ratios, and higher turnover rates.     

Does the equity premium puzzle persist during financial crisis? The case of the French equity market

This paper examines the effects of the financial crisis that began in 2008 on the equity premium of 6 French sector indices. Since the systematic risk coefficient beta remains the most common explanatory element of risk premium in most asset pricing models, we investigate the impact of the crisis on the time-varying beta of the six sector indices cited. We selected daily data from January 2003 to December 2012 and we applied the bivariate MA-GARCH model (BEKK) to estimate time-varying betas for the sector indices. The crisis was marked by increased volatility of the sector indices and the market. This rise in volatility led to an increase in the systematic risk coefficient during the crisis and first post-crisis period for all the major indices. The results are intuitive and corroborate findings in the empirical literature. The increase of the time-varying beta is considered by investors as an additional risk. Therefore, as expected, investors tend to increase their equity premiums to b ear the impact of financial crisis.     

Can company-fund manager meetings convey informational benefits? Exploring the rationalisation of equity investment decision making by UK fund managers

Conventional economic theory, applied to information released by listed companies, equates ‘useful’ with ‘price-sensitive’. Stock exchange rules accordingly prohibit the selective, private communication of price-sensitive information. Yet, even in the absence of such communication, UK equity fund managers routinely meet privately with the senior executives of the companies in which they invest. Moreover, they consider these brief, formal and formulaic meetings to be their most important sources of investment information. In this paper we ask how that can be. Drawing on interview and observation data with fund managers and CFOs, we find evidence for three, non-mutually exclusive explanations: that the characterisation of information in conventional economic theory is too restricted, that fund managers fail to act with the rationality that conventional economic theory assumes, and/or that the primary value of the meetings for fund managers is not related to their investment decision making but to the claims of superior knowledge made to clients in marketing their active fund management expertise. Our findings suggest a disconnect between economic theory and economic policy based on that theory, as well as a corresponding limitation in research studies that test information-usefulness by assuming it to be synonymous with price-sensitivity. We draw implications for further research into the role of tacit knowledge in equity investment decision-making, and also into the effects of the principal–agent relationship between fund managers and their clients.     

Are hedge fund managers systematically misreporting? Or not?

A discontinuity, or kink, at zero in the hedge fund net return distribution has been interpreted as evidence of managers manipulating returns to avoid showing small losses. Instead, we propose alternative explanations for this phenomenon. In particular, we show that incentive fees can mechanistically create a kink in the net return distribution. This mechanism accounts for almost the entire kink observed in the large, liquid Long-Short Equity style. Furthermore, we show that asset illiquidity and the bounding of yields at zero can generate distribution discontinuities as well. Therefore, we conclude that the observed hedge fund return discontinuities are not direct proof of manipulation.     

Long-term negative fund alpha: Is it caused by bad skill or bad luck?

This paper examines the sources of long-term negative fund alpha. We compare the actual loser funds with a control group of bootstrapped loser funds. We find that the returns of the two fund groups are co-integrated, and that they are similar in market risk exposure, alpha consistency, portfolio holdings, and GARCH volatility. The test results show that long-term negative fund alpha occurs due to bad luck rather than to bad skill.     

Do foreign exchange fund managers behave like heterogeneous agents?

This paper estimates an Heterogeneous Agent Model (HAM) on currency trader indices to explain the large shifts in profitability in currency styles surrounding the global financial crisis. In the model, fund managers allocate capital conditional on recent performance to a value strategy, a momentum strategy, and a carry strategy. Subsequent estimation results reveal that (1) a large part of the behavior of currency managers can indeed be described by these three simple strategies, and (2) currency managers shift capital from recent winning styles to recent losing styles, and hence apply a negative feedback strategy. We finally show that a negative feedback strategy is indeed optimal, but currency managers could improve performance by applying it less aggressively if they were able to.     

Do private equity owners increase risk of financial distress and bankruptcy?

In this study, we investigate financial distress risks of European companies around the buyout event in the period between 2000 and 2008. In addition, we analyze whether buyout companies go bankrupt more often than comparable non-buyout companies. Our results suggest that private equity investors select companies which are less financially distressed than comparable non-buyout companies and that the distress risk increases after the buyout. Despite this increase, private equity-backed companies do not suffer from higher bankruptcy rates than comparable non-buyout companies. In fact, when companies are backed by experienced private equity funds, their bankruptcy rates are even lower. These findings indicate that experienced investors are better able to manage distress risks than their inexperienced counterparts.     

The nature of listed real estate companies: property or equity market?

This paper addresses the question of whether shares of public real estate companies should be treated as real estate or as equity investments. Because theoretical considerations do not suffice for making such a classification, we empirically investigate correlation structures and cointegration relationships of private and public real estate and equity markets for the United States and the United Kingdom. Our results suggest that public real estate stocks show similarities to the general stock market with regard to short-term return co-movements. For long-term investment horizons, the interdependence between direct and securitized real estate is much stronger. However, in the latter case, real estate stocks substantially lead the private property markets.

Can investors time their exposure to private equity?

Private equity performance, both for buyouts and venture capital, has been highly cyclical: periods of high fundraising have been followed by periods of low performance. Despite this seemingly predictable variation, we find modest gains, at best, to pursuing realistic, investable strategies that time capital commitments to private equity. This occurs, in part, because investors can only time their commitments to funds; they cannot time when commitments are called or when investments are exited. There is a high degree of time-series correlation in net cash flows even across commitment strategies that allocate capital in a very different manner over time.     

Speculation or currency? Multi-scale analysis of cryptocurrencies—The case of Bitcoin

This paper proposes a novel two-stage VMD-based multi-scale regression to analyze various cryptocurrency attributes that are still unclear in the existing literature. In the first stage, Variational Mode Decomposition (VMD) is used to decompose the cryptocurrency prices into low, medium and high frequency modes with different attributes. In the second stage, the VMD-based multi-scale regression is proposed for these modes with selected explanatory variables. Using the proposed framework, we focus on analyzing the multiple attributes of daily Bitcoin price data as a case study. Empirical results indicate that the low-frequency mode has specific currency or long-term investment characteristics, unlike the short/medium-term investment attributes for the medium-frequency mode, while the high-frequency mode represents some speculation. Some events merely affect a single frequency mode, but others impact all frequency modes. The results of events analysis based on VMD could enhance the identification of the multiple attributes of Bitcoin. Our findings are insightful for future regulation and management of virtual currencies.     

Do birds of the same feather flock together?: The case of the Chinese states equity markets

We examine the equity market price interdependence between China, Hong Kong, Singapore, and Taiwan based on the [Journal of Econometrics 66 (1995) 225] causality test which we bootstrap with leveraged adjustments. A new information criterion is used to choose the optimal lag order. We cover the period January 1, 1993–September 10, 2001 taking into account the Asian financial crisis in 1997. We find that before the Asian crisis, the only interaction among the Chinese markets was between Singapore and the markets of Taiwan and Hong Kong with the causality running from the former to the latter. However, after the Asian crisis, the Chinese equity markets became more interdependent among themselves although Hong Kong remained non-influential.