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Do Absolute Return Mutual Funds Have Absolute Returns?

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Luck Versus Skill in the Cross Section of Mutual Fund Returns

The aggregate portfolio of actively managed U.S. equity mutual funds is close to the market portfolio, but the high costs of active management show up intact as lower returns to investors. Bootstrap simulations suggest that few funds produce benchmark-adjusted expected returns sufficient to cover their costs. If we add back the costs in fund expense ratios, there is evidence of inferior and superior performance (nonzero true ) in the extreme tails of the cross-section of mutual fund estimates.

Incubation is a strategy for initiating new funds, where multiple funds are started privately, and, at the end of an evaluation period, some are opened to the public. Consistent with incubation being used by fund families to increase performance and attract flows, funds in incubation outperform nonincubated funds by 3.5% risk-adjusted, and when they are opened to the public they attract higher flows. Postincubation, however, this outperformance disappears. This performance reversal imparts an upward bias to returns that is not removed by a fund size filter. Fund age and ticker creation date filters, however, eliminate the bias. Copyright (c) 2010 the American Finance Association.

Hedge Funds: Performance, Risk, and Capital Formation

We use a comprehensive data set of funds-of-funds to investigate performance, risk, and capital formation in the hedge fund industry from 1995 to 2004. While the average fund-of-funds delivers alpha only in the period between October 1998 and March 2000, a subset of funds-of-funds consistently delivers alpha. The alpha-producing funds are not as likely to liquidate as those that do not deliver alpha, and experience far greater and steadier capital inflows than their less fortunate counterparts. These capital inflows attenuate the ability of the alpha producers to continue to deliver alpha in the future. Copyright (c) 2008 The American Finance Association.

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Ranking Mutual Fund Families: Minimum Expenses and Maximum Loads as Markers for Moral Turpitude

We evaluate the performance of 51 mutual fund families based on a study of their diversified US managed mutual funds over an 11 year period and explore the determinants of performance gross of published expenses. We find that mutual fund families which charge loads, high expenses to their most favored investors and have high turnover tend to perform badly, even gross of these fees. However, gross

of published expenses, managed mutual fund portfolios of those families without loads, with low expenses in their least expensive class, and with low average turnover beat the corresponding indexes.

Factors that affect mutual fund investment decision of Indian investors

International Journal of Behavioural Accounting and Finance

The paper seeks to extend the findings of Gill and Biger (2009) related to gender differences and factors that affect stock investment decision of Western Canadian investors by examining the affects of: 1) investors investment expertise; 2) investors knowledge of neutral information; 3) investors consultation with investment advisors on their decisions to invest in mutual funds. The present

study is based on a sample of people living in Punjab and Delhi areas of India. Subjects were asked about their beliefs and feelings in relations to their investment decisions with particular reference to investments in mutual funds. We found that the degree of mutual fund investment decision is related to the degree of Indian investors perceptions about their: 1) investment expertise; 2) general knowledge about the economy and the concept of mutual funds; 3) consultation with investment advisors. Family size also plays some role in the decision to invest in mutual funds. The valuable and useful recommendations for the investment managers and investment advisors have also been provided in the paper.

Do Investors Show an Attentional Bias toward Past Performance? An Eye-Tracking Experiment on Visual…

The task of financial decision making poses substantive challenges and difficulties for investors, which is not surprising given the complexity of financial products and the neverending innovations in the financial services and information technology sectors. The thousands of options available to investors and the enhanced regulatory disclosure requirements demand a great deal of motivation and

ability on the part of investors, and are often a source of information overload (Diacon and Hasseldine, 2007; Kozup and Hogarth, 2008; Kozup et al, 2008; Estelami, 2009). For example, in a survey by the Investment Company Institute (2006), many fund investors indicated that fund prospectuses are difficult to understand, and they stated their preference for graphics and charts over narrative descriptions of investments. It is therefore not surprising that investors overwhelmingly rely on past performance data and advertisements as important sources of information for decision making (Capon et al, 1996; Wilcox, 2003). Given that statutory prospectuses are complex and that graphical displays to enhance readability are generally absent, the Securities and Exchange Commission (SEC) adopted amendments to simplify disclosures. Investors are to be provided with key information, such as investment objectives, investment risks and costs, as well as past performance data, in a summary prospectus (SEC, 2009; Beshears et al, 2009). Given that financial services marketers selectively advertise their high-performing funds, which can create unrealistic return expectations, the SEC has also amended rules on past performance presentations. Moreover, the amended rules require a disclaimer warning that past performance is a poor indicator of future results (Feuerborn, 2001; Federal Register, 2003; Koehler and Mercer, 2009).

Mutual Funds Trading and Chinese Mergers and Acquisitions

In developing capital markets dominated by individual investors, there is a potential for greater disparity in the interests of institutional investors and controlling shareholders and this has implications for the trading and monitoring activities of institutional investors in these markets, particularly around high impact corporate decisions. We examine the trading activities of mutual funds

(as the largest institutional investor in this market) in corporate acquisition activities where there is potential for a wide disparity of interest between institutional investors and controlling shareholders. We find that Top Mutual Fund Management Company (TFC) have strong incentives to trade and realize profits over the event months for fear of price drop due to the mean reversion and herding effect in Chinese capital market.

Putting the Shareholder First, A Lifetime Ideal: A Conversation with John Bogle

Over the course of his fifty-five-year career in the investment industry, John C. Bogle, founder and former chairman of The Vanguard Group, redefined investing for the individual investor and became known as the conscience of the mutual fund industry. Concerned since his undergraduate days at Princeton University about the impact of costs on the returns that investors receive, Mr. Bogle turned a

career setback in the mid-1970s into an opportunity to put his early beliefs into action. Within the space of three years, he had established Vanguard, the first mutual fund company to be owned by its fund shareholder clients; created the first index mutual fund; and pioneered the concept of the modern no-load mutual fund. In April 2006, Mr. Bogle talked with members of the Journal of Investment Consulting Editorial Advisory Board about the experiences that shaped his philosophy, his views on the costs of financial intermediation, and his recommendations for improving corporate governance.

The risk level discriminatory power of mutual fund investment objectives: Additional evidence

We reexamine the information content of mutual fund investment objectives to learn whether investors can use them to infer risk. For investment objectives to properly convey risk, risk must be heterogeneous between investment objective groups and homogeneous within them. The present study differs from earlier work in two important ways: (1) it reaches a generally different conclusion about

within-objective class fund risk, and (2) it is being done against a backdrop of industry-wide incentive compensation structures that rely on these classifications as proxies for fund volatility. Empirical testing suggests that risk is heterogeneous within groups.

This paper investigates the investment performance of a comprehensive group of financial institutions including banks, insurance companies, mutual funds, independent investment advisors, and corporate and state pension funds based on quarterly disclosures of their equity-portfolio holdings. On aggregate, financial institutions exhibit significant abnormal performance before expenses are

subtracted. This result is robust with respect to several conditional and unconditional performance measures based on factor- and characteristic-benchmarks. Institutional performance is related to the size of the managed portfolio, its stock characteristics, and its flows. Performance varies across types of institutions – banks, independent investment advisors, and mutual funds significantly outperform insurance companies and state pension funds. This pattern is not caused by systematic mispricings by the applied asset pricing models. The variation of performance across the major institutional types is consistent with agency theory and the transparency hypothesis of Ross (1989).

Alpha and Performance Measurement: The Effect of Investor Heterogeneity

Studies of investment performance routinely use various measures of alpha, yet the literature has not established that a positive (negative) alpha, as traditionally measured, means that an investor would want to buy (sell) a fund. However, under general conditions, when alpha is defined using the clients marginal utility function, a client faced with a positive alpha would want to buy the fund.

Thus, performance measurement is inherently investor specific, and investors will disagree about the attractiveness of a given fund. We provide empirical evidence that bounds the effects of investor heterogeneity on performance measures, and study the cross sectional effects of disagreement on investors flow response to past fund performance. The effects of investor heterogeneity are economically and statistically significant.

Competition in Portfolio Management: Theory and Experiment

We develop a new theory of delegated investment whereby managers compete in terms of composition of the portfolios they promise to acquire. We study the resulting asset pricing in the inter-manager market. We incentivize investors so that we obtain sharp predictions. Managers are paid a fixed fraction of fund size. In equilibrium, investors choose managers who offer portfolios that mimic

Arrow-Debreu (state) securities. Prices in the inter-manager market are predicted to satisfy a weak version of the CAPM: state-price probability ratios implicit in prices of traded assets decrease in aggregate wealth across states. An experiment involving about one hundred participants over six weeks broadly supports the theoretical predictions. Pricing quality declines, however, when fund concentration increases because funds flow towards managers who offer portfolios closer to Arrow-Debreu securities (as in the theory) and who had better recent performance (an observation unrelated to theory).

Does Size Matter? Scale and Scope Economies of German Investment Management Companies

Standard measures of economies of scale and scope show that size does matter for German investment management companies. The average investment management company faces an increase in costs of 0.71% for a 1% increase in assets under management. Small to mid-sized companies in our example exhibit statistically significant scale economies. These economies of scale show a size trend. Furthermore,

there is empirical evidence of economies of scope between retail and institutional funds, but the cost savings are greater for large investment management companies. Economies of scope also exhibit a size trend, i.e. larger companies show fewer scope economies.

Should business groups be in finance? Evidence from Indian mutual funds

A primary risk associated with business groups entering the financial sector is that groups will misallocate capital to own group firms, hurting investors and economic development. We study this issue in the context of business group owned mutual funds in India, where business groups have been present for over twenty years, and we can observe capital allocation decisions monthly. Business-group

owned funds do not over-weight member firms, nor do they prop up member firm stocks or earn excess returns on their member firm investments. Business-group funds have an advantage when they focus on industries where the group operates, although we cannot distinguish whether this is due to insider trading versus (legal) specialization. Current regulations appear sufficient to prevent capital misallocation in member firms, but monitoring of investments in related sectors seems warranted.

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