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Mutual/Hedge Funds

Do investors in mutual funds and hedge funds get their fair share of returns, or are they perpetually disadvantaged by fees and underperforming fund managers? Are there ways to exploit fund behaviors? These blog entries relate to mutual funds and hedge funds.

The Wall Street Journal’s SmartMoney Fund Screen

Does the Wall Street Journal’s SmartMoney Fund Screen help its readers beat the market? In the February 2008 version of their paper entitled “Do Mutual Fund Media Recommendations Hold Value? An Empirical Analysis of the Wall Street Journal’s SmartMoney Fund Screen”, George Comer, Norris Larrymore and Javier Rodriguez employ two methods to test the performance of mutual funds listed at the ends of the Wall Street Journal’s SmartMoney Fund Screen columns during the year before and the year after publication. These weekly columns flag top performing mutual funds based on criteria such as fund objective, historical returns and expense ratios. The authors collect and assign the funds in these lists to one of five fund categories: domestic equity, international equity, sector, hybrid (asset allocation and balanced funds) and fixed income. Using daily returns for 399 mutual funds (263 unique) listed during 2005, they conclude that: Keep Reading

A Fresh Hedge Fund Horse Every Couple of Years?

Do hedge funds have a predictable life cycle? If so, can investors exploit it? In his January 2008 draft paper entitled “The Life Cycle of Hedge Funds”, Dieter Kaiser investigates whether excess returns diminish as a hedge fund ages perhaps because: (1) successful hedge funds outgrow their target markets; (2) good returns attract other investment managers who compete for similar inefficiencies; and/or (3) successful hedge funds outgrow their founding entrepreneurial spirits. Using return data for an initial sample of 1,433 hedge funds over the period January 1996 through May 2006, he finds that: Keep Reading

Reliable Outperformance Among Bond Fund Managers?

Does past performance predict future results for bond funds? In their April 2007 paper entitled “‘Hot Hands’ in Bond Funds”, Joop Huij and Jeroen Derwall measure persistence in the relative performance of bond mutual funds. Using return data for 3,549 bond funds spanning 1990-2003, they find that: Keep Reading

Do Hedge Fund Investors Chase or Successfully Time Returns?

Are presumably sophisticated (or at least wealthy) hedge fund investors on the whole past return chasers or future return finders? In their November 2007 paper entitled “Aggregate Hedge Fund Flows and Asset Returns”, Ashley Wang and Lu Zheng answer these questions in aggregate by analyzing the overall flow of money into and out of hedge funds. They also examine separately flow patterns for ten hedge fund categories: convertible arbitrage, dedicated short bias, emerging markets, equity market neutral, event driven, fixed income arbitrage, global macro, long/short equity, managed futures and multi strategies. Using quarterly hedge fund flow and return data across the ten fund categories from first quarter 1994 to first quarter 2007, they find that: Keep Reading

Do Hedge Funds Play the “Famous” Anomalies?

Do hedge funds systematically exploit the major stock return anomalies? Or, do they earn their keep (if they do) via more arcane strategies? In their January 2008 paper entitled “Do Hedge Funds Arbitrage Market Anomalies?”, Dan Lawson and David Peterson apply a seven-factor model (market, size, value, momentum, earnings momentum, equity financing and asset growth) to investigate whether hedge funds successfully exploit market anomalies. They also examine whether hedge funds generate abnormal returns separately from these “famous” factors. Using detailed data on 1,460 individual hedge funds involving 21 types of strategies and stock return anomaly data for the period 1990-2005, they find that: Keep Reading

Mutual Fund Investors Underperform Their Underperforming Funds?

Mutual fund investors have two ways to beat the market: (1) pick the right funds, and (2) time their purchases and sales. How effectively does the average fund investor execute the latter goal? In their December 2007 paper entitled “Investor Timing and Fund Distribution Channels”, Mercer Bullard, Geoff Friesen and Travis Sapp examine the investment timing performance of equity mutual fund investors and the relationship of this performance to the fund distribution channel. Using data on returns and funds flows for 6,164 U.S. equity mutual funds during 1991-2004, they conclude that: Keep Reading

Stock Picking or Industry Picking?

Which path, stock picking (company analysis) or industry picking (economic trend analysis) is the more direct to investing outperformance? In their December 2007 paper entitled “Mutual Fund Industry Selection and Persistence”, Jeffrey Busse and Qing Tong examine the relative importance of industry selection and stock selection in the performance of actively managed mutual funds. Using quarterly stockholdings during 1980-2006 for a large sample of actively managed U.S. equity mutual funds, along with associated stock return data, they find that: Keep Reading

Do Funds Focused on Just a Few Stocks Outperform?

Do the most skilled stock pickers among fund managers gravitate toward funds that focus on a few good ideas, thereby outperforming diversified peers? In their recent paper entitled “Security Concentration and Active Fund Management: Do Focused Funds Offer Superior Performance?”,  Travis Sapp and Xuemin Yan examine whether funds concentrated in relatively few securities outperform. Using price and holdings data for a broad sample of U.S. equity mutual funds operating at any time during 1984-2002 (2,278 funds encompassing 16,399 fund-years), they conclude that: Keep Reading

How Fund Managers React to Success and Failure

How do fund managers behave when they have recently outperformed or underperformed? Do winners hunker down and protect their gains, while losers ratchet up risk to recover. In two recent papers, Manuel Ammann and Michael Verhofen use a variety of risk measures to analyze the impact of prior performance on the risk-taking behavior of mutual fund managers. Their October 2006 paper entitled “Prior Performance and Risk-Taking of Mutual Fund Managers: A Dynamic Bayesian Network Approach” examines year-to-year changes in fund risk levels based on a large sample of U.S. mutual funds and contemporaneous risk premium data (market, size, value, momentum) over the period 1985-2003. Their subsequent November 2007 paper entitled “The Impact of Prior Performance on the Risk-Taking of Mutual Fund Managers” examines changes in fund risk levels from the first half of the year to the second half based on daily return data for a large sample of U.S. mutual funds and contemporaneous risk premium data over the period 2001-2005. In both papers, they conclude that: Keep Reading

Measuring the Level and Persistence of Active Fund Management

What is the best approach for measuring the stock picking, industry concentration and factor risk aspects of active fund management? In the October 2007 update of their paper entitled “How Active Is Your Fund Manager? A New Measure That Predicts Performance”, Martijn Cremers and Antti Petajisto introduce “Active Share” to quantify active portfolio management in terms of the share of portfolio holdings that differ from the makeup of an appropriate benchmark index. They then apply Active Share (measuring stock/industry selection) in combination with index tracking error (measuring factor bets) to evaluate equity mutual funds. Using data on holdings and returns for 2,647 U.S. equity mutual funds and 19 associated benchmark indexes spanning 1980-2003, they conclude that: Keep Reading

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