* Numerous funds comprising hundreds of billions of dollars are allocated in public markets to ETF investments in factor strategies related to value and/or growth. These funds may be passive or ...actively managed, but in either case they are designed to provide exposure (positively or negatively) to the "value" factor that has been demonstrated repeatedly in academic literature to exhibit a return premium. * The value factor has been defined in several different ways by practitioners but has been most consistently defined and thoroughly researched in academic literature by the HML factor (the returns to high book-to-market stocks minus low book-to-market stocks) of Fama and French (1992). By definition, HML partitions value and growth firms by book-to-market, and therefore the "growth" factor is simply a negative exposure to HML. * Even among the most popular, most liquid funds, value- and growth-factor exposure varies among funds and through time, sometimes dramatically. Financial advisers need to monitor this exposure carefully to be sure their clients are positioned as intended.
We study the high-moment distribution of hedge fund returns and identify factors that drive high-moment risk. Using hedge fund monthly returns, we find a strong correlation between the first four ...moments of returns (i.e. mean, standard deviation (SD), skewness, and kurtosis) and different characteristics of the funds such as leverage, liquidity, incentives, and strategy-related factors. We find that after controlling for other factors, incentives-related factors and a hedge fund's specific strategy have the greatest impact on the distribution of fund returns. Our evidence also suggests investors allocate across hedge fund characteristics while placing greater emphasis on fund strategies and incentive factors.
PurposeThis study aims to examine the solvency and performance persistence of defined benefit private and public pension plans (DBPPs) in the Republic of Congo.Design/methodology/approachThe authors ...use the 2 × 2 contingency table approach and the time product ratio (TPR)-based cross-product ratio (CPR) on data covering ten years from 2011 to 2020, with variable funded ratios and excess returns, to determine the solvency and performance persistence of defined benefit pension plans.FindingsThe authors document a lack of solvency and performance persistence in DBPP funds. They conclude that the solvency and performance of DBPP funds are not repetitive. The previous year's private and public defined benefit pension funds’ results do not repeat in the current year. Hence, the current solvency and performance of defined benefit pension funds are not good predictors of future funds' solvency and performance.Originality/valueTo the best of the authors’ knowledge, this study is the first to combine solvency and performance to examine the persistence of defined benefit pension plans in sub-Saharan Africa.
Abstract
In the early 2000s, the market for private-label residential mortgage-backed securities was built upon a pyramid of risk, and at the foundation of this pyramid were hedge funds. Few ...post-mortems recognise the critical role played by these institutional investors. This paper uncovers this essential piece of the puzzle and demonstrates that it is a natural outgrowth of the inherent operational freedom that defines hedge funds. It breaks these foundational risks down into two components—illiquidity risk and tail risk—and proposes solutions to prevent them from spilling over into systemic crises without eliminating the benefits that society reaps from this unique risk-taking. It concludes with important lessons for securitisation markets to consider during and after the COVID-19 recession.
•We run an individual dynamic experiment on discrete choice between few alternatives.•We study the effect of past performance of alternatives on switching behavior.•A discrete choice model with ...predisposition effect fits the data reasonably well.•Intensity of choice parameter is not universal and depends on the returns structure.•These findings provide a microfoundation for heterogeneous agent models.
We run a laboratory experiment to study how human subjects switch between several profitable alternatives, framed as mutual funds, in order to provide a microfoundation for so-called heterogeneous agent models. The participants in our experiment have to choose repeatedly between two, three or four experimental funds. The time series of fund returns are exogenously generated prior to the experiment and participants are paid for each period according to the return of the fund they choose. For most cases participants’ decisions can be successfully described by a discrete choice switching model, often applied in heterogeneous agent models, provided that a predisposition toward one of the funds is included. The estimated intensity of choice parameter of the discrete choice model depends on the structure of the fund returns. In particular, it increases with correlation between past and future returns. This suggests human subjects do not myopically chase past returns, but are more likely to do so when past returns are more predictive of future returns, a feature that is absent in the standard heterogeneous agent models.
This paper investigates the role of scale in Real Estate Mutual Fund (REMF) performance. We test the impact of both fund-level and industry-level economies of scale on fund performance. We provide ...consistent evidence that industry size erodes REMF performance. After controlling for endogeneity concerns, we document an insignificant relation between fund size and performance. Taken together, these findings suggest that the rapid growth of the REMF industry over the past few decades has materially impacted active managers’ ability to consistently outperform their passive benchmarks. As more capital flows into the industry, competition for alpha increases, and investment opportunities dwindle. This effect is stronger in funds who are especially active in seeking out those increasingly elusive opportunities. Specifically, the effect of industry size on alpha is particularly negative for funds with higher turnover ratios, expense ratios, and volatility of returns.
We show theoretically that the responsiveness of a fund manager's portfolio allocations to changes in public information decreases in the manager's skill. We go on to estimate this sensitivity (RPI) ...as the R2of the regression of changes in a manager's portfolio holdings on changes in public information using a panel of U.S. equity funds. Consistent with RPI containing information related to managerial skills, we find a strong inverse relationship between RPI and various existing measures of performance, and between RPI and fund flows. We also document that both fund- and manager-specific attributes affect RPI.
In this study, we examine whether the financial performances of socially responsible investment (SRI) mutual funds are related to the features of the screening process. Based on a sample of French ...SRI funds, we find evidence that a greater screening intensity slightly reduces financial performance (but the relationship runs in the opposite direction when screening gets tougher). Further, we show that only sectoral screens – such as avoiding ‘sin’ stocks – decrease financial performance, while transversal screens – commitment to UN Global Compact Principles, ILO/Rights at Work, etc. – have no impact. Lastly, when the quality of the SRI selection process is proxied by the rating provided by Novethic, its impact is not significant, while a higher strategy distinctiveness amongst SRI funds, which also gives information on the quality of the selection process, is associated with better financial performance.
Mutual fund advisers either expense the cost of research and other services or pay for them with soft dollars. This study is the first to use actual soft dollar and total brokerage commission figures ...for a large number of funds and to examine how soft dollars are linked to mutual fund governance. Employing a survivorship bias-free sample of actively managed US mutual funds, we find that higher soft dollar and total brokerage commissions are associated with higher advisory fees but not with higher risk-adjusted fund returns. These findings suggest that mutual fund shareholders, on average, do not benefit from the research and the information supplied by third parties such as brokers. We also find that larger and more highly compensated boards are associated with lower advisory fees. Larger boards are also associated with slightly lower turnover. The median tenure of board directors is negatively correlated with soft dollar commissions and turnover, but not correlated with total brokerage commissions or the cost of turning over a portfolio. Higher proportions of directors with a finance background are associated with higher advisory fees, brokerage commissions, and turnover costs. These associations might indicate greater agency costs.
We examine impediments to liquidity provision by mutual funds to insurance companies during corporate bond fire sales. We find that financial regulation and limited capital capacity significantly ...affect liquidity provision. Mutual funds reduced their purchase of fire-sale bonds following regulatory changes after the 2008–2009 financial crisis. Funds facing more capital constraints (proxied by smaller cash and Treasury holdings, less liquid corporate bond investments, higher redemption risk, and less active investment styles) provide less liquidity. Mutual funds actively investing in fire-sale bonds earn significant returns from liquidity provision and demonstrate superior overall skills in corporate bond investments.
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