Mutual Fund Performance and the Incentive to Generate Alpha PDF Download
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Author: Diane Del Guercio
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Financial economists have long been puzzled by investor demand for actively managed funds that generate, on average, negative after-fee, risk-adjusted returns. To shed new light on this puzzle, we exploit the fact that funds in different market segments compete for different types of retail investors. Within the segment of funds marketed directly to retail investors, we find that flows chase risk-adjusted returns, and that funds respond by investing more in active management. Importantly, within this direct-sold segment, we find little evidence that actively managed funds underperform index funds. In contrast, within the segment of funds sold through brokers, which we demonstrate face a weaker incentive to generate alpha, we find that actively managed funds significantly underperform index funds. We conclude that the well-known underperformance of the average actively managed fund in the full sample is driven by the large fraction of funds with weak incentives to identify and motivate skilled managers.
Author: Diane Del Guercio
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Financial economists have long been puzzled by investor demand for actively managed funds that generate, on average, negative after-fee, risk-adjusted returns. To shed new light on this puzzle, we exploit the fact that funds in different market segments compete for different types of retail investors. Within the segment of funds marketed directly to retail investors, we find that flows chase risk-adjusted returns, and that funds respond by investing more in active management. Importantly, within this direct-sold segment, we find little evidence that actively managed funds underperform index funds. In contrast, within the segment of funds sold through brokers, which we demonstrate face a weaker incentive to generate alpha, we find that actively managed funds significantly underperform index funds. We conclude that the well-known underperformance of the average actively managed fund in the full sample is driven by the large fraction of funds with weak incentives to identify and motivate skilled managers.
Author: Diane Del Guercio
Publisher:
ISBN:
Category : Economics
Languages : en
Pages : 53
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Book Description
It is well known that within U.S. domestic equity mutual funds, actively managed funds significantly underperform index funds. However, this comparison ignores the fact that mutual funds targeted at different types of investors charge different fees, and use these fees to provide different bundles of services. To control for these differences, we compare the performance of actively managed funds and index funds within each of three broad market segments: retail funds sold directly to investors, retail funds sold through brokers, and institutional funds. We find that underperformance is strongest in the broker-sold segment and weakest in the direct-sold segment. In fact, we find that within the direct-sold segment, the risk-adjusted, after-fee returns of actively managed funds are statistically indistinguishable from those of index funds, consistent with the equilibrium condition in Grossman and Stiglitz (1980). To rationalize differences in performance, we test for differences in the flow-performance relation across the three segments. We find that fund flows respond most strongly to risk-adjusted returns in the direct-sold segment. We find a wide variety of evidence that direct-sold funds respond to investor preferences for risk-adjusted performance by investing more in active management. Our findings suggest that the underperformance of the average actively managed fund reflects its weaker incentives to generate alpha rather than an inability to generate alpha. We argue that our findings also help to explain the continued demand for actively managed funds.
Author: John M. Longo
Publisher: World Scientific
ISBN: 9812834664
Category : Business & Economics
Languages : en
Pages : 333
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Book Description
Hedge funds are perhaps the hottest topic in finance today, but little material of substance to date has been written on the topic. Most books focus on how to set up a hedge fund and the basic strategies, while few to none focus on what matters most: generating and understanding investment performance. This book takes an exclusive look at the latter, including an analysis of the areas that are most likely to generate strong investment returns OCo namely, the emerging markets of Brazil, Russia, India and China. The book will be invaluable to not only financial professionals, but anyone interested in learning about hedge funds and their future.
Author: Massimo Massa
Publisher:
ISBN:
Category :
Languages : en
Pages : 47
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Book Description
We study the impact of contractual incentives on the risk-taking behavior and the performance of US mutual funds. We measure incentives using the shape, i.e. concavity, of the fee structure in the advisory contract. Compared to the standard linear fee structure, a concave structure should create a disincentive to take more risk. Our results show that a high incentive contract induces managers to take more risk and reduces the funds' probability of survival. On the other hand, high-incentive funds deliver higher return. The net of these two effects is that incentives increase the risk-adjusted performance of the fund. In particular, the top incentive quintile of funds outperforms the bottom incentive quintile by about 2.7 percent per year. Moreover, the performance of the high-incentive funds is highly persistent. High-incentive winner funds from one year have a positive alpha of 41 basis points per month in the following year. By focusing on the funds' holdings, we show that active portfolio rebalancing is the main channel through which incentives increase performance.
Author: Dunhong Jin
Publisher: International Monetary Fund
ISBN: 1513519492
Category : Business & Economics
Languages : en
Pages : 46
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Book Description
How to prevent runs on open-end mutual funds? In recent years, markets have observed an innovation that changed the way open-end funds are priced. Alternative pricing rules (known as swing pricing) adjust funds’ net asset values to pass on funds’ trading costs to transacting shareholders. Using unique data on investor transactions in U.K. corporate bond funds, we show that swing pricing eliminates the first-mover advantage arising from the traditional pricing rule and significantly reduces redemptions during stress periods. The positive impact of alternative pricing rules on fund flows reverses in calm periods when costs associated with higher tracking error dominate the pricing effect.
Author: Erik Kole
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
We propose a new approach for estimating mutual fund performance that simultaneously controls for both factor exposure and firm characteristics. This double-adjusted alpha is motivated by the recent findings that traditional Fama-French style factor models do not fully adjust returns for the anomalies related to the factors. We formulate a hierarchical Bayesian model which separates the part of the traditional alpha that can be related to firm and asset characteristics from the true alpha. Our Bayesian approach is straightforward, has theoretical advantages over the traditional two-pass estimation and leads to higher precision. Our double-adjusted alphas produce a different ranking of mutual funds than the traditional alphas. We show that as a consequence, the double-adjusted alphas lead to stronger evidence of persistence of mutual fund performance. On the other hand, we find that the link between selectivity and alpha is driven by the effect of characteristics. Finally, we show that fund flows are mostly driven by the true skill part of the return and hardly by the effect of characteristics. We conclude that good measurement of the true outperformance of mutual funds is crucial for understanding skill.
Author: Iordanis Karagiannidis
Publisher:
ISBN:
Category : Mutual funds
Languages : en
Pages : 354
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Book Description
Author: Keith Cuthbertson
Publisher: John Wiley & Sons
ISBN: 1119595592
Category : Business & Economics
Languages : en
Pages : 116
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Book Description
Three experts provide an authoritative guide to the theory and practice of derivatives Derivatives: Theory and Practice and its companion website explore the practical uses of derivatives and offer a guide to the key results on pricing, hedging and speculation using derivative securities. The book links the theoretical and practical aspects of derivatives in one volume whilst keeping mathematics and statistics to a minimum. Throughout the book, the authors put the focus on explanations and applications. Designed as an engaging resource, the book contains commentaries that make serious points in a lighthearted manner. The authors examine the real world of derivatives finance and include discussions on a wide range of topics such as the use of derivatives by hedge funds and the application of strip and stack hedges by corporates, while providing an analysis of how risky the stock market can be for long-term investors, and more. To enhance learning, each chapter contains learning objectives, worked examples, details of relevant finance blogs technical appendices and exercises.
Author: Ben Warwick
Publisher: John Wiley & Sons
ISBN: 9780471348221
Category : Business & Economics
Languages : en
Pages : 232
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Book Description
By turns technical, analytical and anecdotal, Ben Warwick's expert investment guide takes you on a whirlwind tour of modern investment theory and practice. Accessible enough to reward dabblers in the field, this book at the same time raises serious issues and attempts to, if not explain them completely, at least point you down the path to financial enlightenment. Abstract or downright abstruse concepts are generously illuminated by side trips into the worlds of one-armed oil wildcatters, Beethoven, Dom Perignon and the mathematician who managed to stop Napoleon's invading armies. getabstract recommends this book as one of the finest overviews of financial theory, technique and practice ever to grace our library's shelves.
Author: Yee Cheng Loon
Publisher:
ISBN:
Category : Bayesian statistical decision theory
Languages : en
Pages :
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Book Description
Model uncertainty exists in the mutual fund literature. Researchers employ a variety of models to estimate risk-adjusted return, suggesting a lack of consensus as to which model is correct. Model uncertainty makes it difficult to draw clear inference about mutual fund performance persistence. We explicitly account for model uncertainty by using Bayesian model averaging techniques to estimate a fund's risk-adjusted return. Our approach produces the Bayesian model averaged (BMA) alpha, which is a weighted combination of alphas from individual models. Using BMA alphas, we find evidence of performance persistence in a large sample of US equity, bond and balanced mutual funds. Funds with high BMA alphas subsequently generate higher risk-adjusted returns than funds with low BMA alphas, and the magnitude of out performance is economically and statistically significant. We also find that mutual fund investors respond to the information content of BMA alphas. High BMA alpha funds receive subsequent cash inflows while low BMA alpha funds experience subsequent cash outflows.
