Mutual/Hedge Funds

In his June 2005 paper entitled “Measuring the True Cost of Active Management by Mutual Funds”, Ross Miller decomposes mutual fund performance into two components: (1) a passive, index-tracking or “closet index” component; and, (2) an actively managed component that generates abnormal returns. What if, he asks, one assigns an index-like portion of annual mutual fund fees (such as the 0.18% expense ratio for Vanguard’s S&P 500 Index Fund) to the passive component and the balance of the fees to the actively managed component? How expensive would active management be, say, in comparison to hedge fund fees? In tackling these questions using the Morningstar database, he finds that: Keep Reading

In their April 2005 paper entitled “Dumb money: Mutual Fund Flows and the Cross-section of Stock Returns”, Andrea Frazzini and Owen Lamont tackle a range of analyses tied to mutual fund inflows and outflows to determine whether or not these flows represent rational behavior on the part of individual investors. Do the flows predict abnormal returns for the underlying stocks? What do they mean for the wealth of the individuals causing them? By studying flows associated with domestic mutual funds from 1980 to 2003, they find that: Keep Reading

In their May 2005 paper entitled “Asset Fire Sales (and Purchases) in Equity Markets”, Joshua Coval and Erik Stafford examine the effects on stock prices of mutual funds forced to sell (buy) because of predictable outflows (inflows) of funds based on their past performance. Does such forced selling and buying present predictable opportunities for front-running? By studying mutual fund transactions caused by capital flows from 1980 to 2003, they conclude that: Keep Reading

In his paper “The Kiss Of Death: A 5-Star Morningstar Mutual Fund Rating?”, appearing in the second quarter 2005 issue of the Journal Of Investment Management, Matthew Morey examines the performance of mutual funds immediately after first achieving a Morningstar 5-star rating. Focusing on diversified domestic stock funds from July 1993 to July 2001 (273 funds), he concludes that: Keep Reading

Hedge funds now haul about $1 trillion in capital from opportunity to opportunity around world markets. Hedge fund managers have latitude to operate in ways that mutual fund managers do not in terms of leverage, shorting and types of assets traded (such as derivatives). What makes the best hedge fund managers successful? In their March 2005 paper entitled “Hedge Fund Performance and Manager Characteristics Education and Age Matter…”, Haitao Li, Rui Zhao and Xiaoyan Zhang correlate the background characteristics of hedge fund managers with the performances of their funds. Using a dataset encompassing 1,000+ hedge funds over the period 1994 to 2003, they conclude that: Keep Reading

In case your mutual fund’s got you down… Keep Reading

In the February 2005 issue of The Financial Review, Burton Malkiel offers “Reflections on the Efficient Market Hypothesis: 30 Years Later” as a pudding-based proof of his famous proposition. He pits the performance of professional investment managers against that of market indices and finds that: Keep Reading

In a recent article for the Journal of Finance, Travis Sapp and Ashish Tawari investigate the “smart money” effect. Mutual funds with positive money flow perform better in the short term than do funds with negative money flow, suggesting good fund selection ability on the part of investors. The authors conclude that: Keep Reading

It should be a good idea to follow the stock-picking leads of all those smart mutual fund managers, shouldn’t it? In their paper “Stock Selection Based on Mutual Fund Holdings: Evidence from Large-Cap Funds?” of February 2004, Robert Weigand, Susan Belden and Thomas Zwirlein investigate whether small investors should value the stock weightings of mutual fund managers in assembling their own portfolios. They conclude that: Keep Reading