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Abstract:
We relate the performance of mutual fund trades to their motivation. A fund manager who buys stocks when there are heavy investor outflows is likely to be motivated by the belief that the stocks are significantly undervalued. In contrast, when there are heavy inflows, the manager is likely to be motivated to work off excess liquidity by buying stocks. Our analysis reveals that managers making purely valuation-motivated purchases substantially beat the market but are unable to do so when compelled to invest excess cash from investor inflows. A similar, but weaker, pattern is found for stocks that are sold. (JEL G11, G29)

Abstract:
We relate the performance of mutual fund trades to their motivation. A fund manager who buys stocks when there are heavy investor outflows is likely to be motivated by the belief that the stocks are significantly undervalued. In contrast, when there are heavy inflows the manager is likely to be motivated to work off excess liquidity by buying stocks. Our analysis reveals that managers making purely valuation-motivated purchases substantially beat the market, but are unable to do so when compelled to invest excess cash from investor inflows. A similar, but weaker, pattern is found for stocks that are sold.

Abstract:
Firms that engage in the simultaneous, or "side-by-side", management of mutual funds and hedge funds have a fiduciary duty to each fund's investors to make portfolio decisions and to execute trades in the most favorable way. This fiduciary duty is put to the test, however, when side-by-side management firms can increase fee income by strategically transferring performance from the mutual funds to the hedge funds they oversee. Our empirical evidence proves consistent with such favoritism. The reported returns of side-by-side mutual funds are significantly less than those of similar mutual funds run by firms that do not also manage hedge funds. A decomposition of reported returns into holdings-return and return-gap components and return-persistence tests also suggest favoritism. Finally, examining a potential wealth transference mechanism, we find evidence consistent with side-by-side mutual funds getting less of a contribution to performance from IPO underpricing than matched unaffiliated mutual funds.

mutual funds, hedge funds, side-by-side arrangements, institutional investors

Abstract:
This study examines whether the disposition effect influences the trades and performance of U.S. equity mutual funds. Compared to previous studies that find overwhelming evidence of the disposition effect in the trades of retail investors, this study documents that the disposition effect has a much weaker influence on the trades of mutual funds. On average, mutual funds appear to realize losses more readily than gains. However, we observe a great deal of heterogeneity among them with respect to the realization of gains and losses, as about 36 percent of the sample funds exhibit a propensity to realize gains more readily than losses. The observed tendency for these funds does not appear to be driven by a contrarian style and it appears to be somewhat consistent through time, making the disposition effect its most likely explanation. The disposition effect influences portfolio characteristics, with portfolios of high disposition funds exhibiting positive loadings on the book-to-market factor and negative loadings on the momentum factor. Relating the disposition effect to fund performance in the cross-section, we find that the disposition effect is negatively related to fund performance in an economically and statistically significant way.

Mutual funds, disposition effect

Abstract:
We study the dispersion of month-end valuations placed on identical corporate bonds by different mutual funds. Such dispersion is related to bond-specific characteristics associated with liquidity and market volatility. Tests suggest that FINRA’s transparency-enhancing TRACE system has increased the precision of corporate bond valuation to the benefit of investors. Other tests reveal the marking patterns of a minority of funds to be associated with return smoothing behavior. However, funds with explicit, self-disclosed marking standards do not appear to smooth returns. These findings suggest that the SEC should require every fund to commit to an explicit marking standard in its prospectus.

mutual funds, bonds, valuation, fair value

Abstract:
Mutual funds that track the S&P 500 are popular because they have significantly lower costs than the average, actively-managed equity fund. However, a measurable number of investors select index funds with excessive fees and uncompetitive returns. We call this observation the Index Fund Rationality Paradox because it conflicts with the belief that index fund investors are making a rational, low-cost choice in their ‘type of fund’ decision. In our analysis of this paradox, we find that both retail and institutional index investors tended to make better choices in recent years, but the cost of poor choices among both groups continues to be significant. In fact, we are able to identify an arguably naïve group of retail investors that seem to be unduly influenced by brokers and financial advisors. These investors are largely responsible for the remaining paradox.

Mutual funds, S&P 500 index

Abstract:
This study examines the performance of mutual funds managed by firms that simultaneously manage hedge funds. We find that the reported returns of mutual funds in these “side-by-side” associations with hedge funds significantly underperformed those of mutual funds that shared similar fund and family characteristics but differed in that they were not affiliated with hedge funds. Digging deeper into performance, we find that the underperformance was confined to return gaps, a return measure that captures the impact of unobservable managerial actions. Interestingly, mutual funds with investment styles that were most closely aligned to affiliated hedge funds generated reported-return alphas and return gaps that underperformed by the greatest amount. Finally, we find that side-by-side mutual funds received less of a contribution to performance from IPO underpricing than similar unaffiliated mutual funds or affiliated hedge funds. Evidence does not support the hypothesis that affiliations with hedge funds allow side-by-side mutual funds to attract superior stock-picking talent. Our evidence does not allow us to rule out the possibility that management firms maximized fee income by strategically transferring performance from mutual funds to hedge funds.

mutual funds, hedge funds, side-by-side arrangements, institutional investors

Abstract:
Despite six empirical studies published since 2000 designed to assess fund managers’ REIT selection ability, their skill remains in question. Unlike previous studies, we examine fund holdings and trades of REITs to answer this question. This allows us to account for portfolio rebalancing that alters REIT-characteristic weights of fund portfolios. All REITs held by funds at each report date are matched to benchmark portfolios of REITs that share similar characteristics. Results show that real estate mutual fund managers, after controlling for size, property type shifting, and momentum, generated significant positive alpha with their securities selection ability as predicted by Grossman and Stiglitz (1980). To understand the sources of such ability, we examine whether fund managers that follow certain trading strategies outperform relative to other managers. The potential investment strategies we examine are related to geographic concentration, public and private real estate valuation, income and appreciation styles, and leverage of the underlying REITs. Exploring these investment strategies, we find that fund managers that focus on geographically concentrated REITs generate higher returns to investors, especially in the later years, consistent with the findings of Capozza and Seguin (1999).

mutual funds, REITs