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Abstract:
This paper conducts a comprehensive analysis of the relation between the performance and governance structure of open-end, domestic-equity mutual funds during the 1985 to 2002 period. Specifically, we analyze the role of fund managers in generating portfolio performance, as well as the role of fund boards, both in the ongoing performance of the fund, and in replacing underperforming managers. We find evidence that experienced large-fund managers and managers with better track-records outperform their size, book-to-market, and momentum benchmarks, which indicates that managers play an important role in generating portfolio performance. However, we find that experienced managers of smaller funds underperform their less-seasoned counterparts, indicating the presence of managerial entrenchment in the asset-management industry. When we examine the role of boards, we find that higher numbers of independent directors predict both better future performance and a higher likelihood of underperforming manager replacement, which indicates that the structure of the board is an important determinant of governance quality. Overall, our findings add new insights to the ongoing debate on fund governance.

Mutual Funds, Investment Management, Corporate Governance

Abstract:
This paper conducts a comprehensive analysis of the relation between the performance and governance structure of open-end mutual funds during the 1985 to 2002 period. Specifically, we analyze the role of fund managers in generating portfolio performance, as well as the role of fund boards, both in the ongoing performance of the fund, and in replacing underperforming managers. We find evidence that growth-fund managers with more experience and better track-records outperform their peers, which indicates that manager characteristics are key in explaining portfolio performance for these funds. Further, we find evidence of efficiencies in the labor market for fund managers, in that replaced managers underperform their peers, on average. Specifically, the incoming manager outperforms the replaced manager by one percent per year; in addition, we find that poorly performing fund managers are more likely to be replaced by funds having larger numbers of outside directors on their boards, indicating that the structure of the board is an important determinant of governance quality. However, we also find evidence consistent with manager entrenchment. That is, experienced managers perform well only when they manage large funds - experienced small fund managers underperform their less-seasoned counterparts. Overall, our findings add new insights to the ongoing debate on fund governance.

Mutual Fund Performance, Mutual Fund Managers, Mutual Fund Governance

Abstract:
This paper studies the effect of share restrictions on the flow-performance relation of individual hedge funds. As such, we reconcile previous research that shows conflicting results for this relation without explicitly considering restrictions. Specifically, we find that hedge funds exhibit a convex flow-performance relation in the absence of share restrictions (similar to mutual funds), but exhibit a concave relation in the presence of restrictions—our evidence is consistent with both a direct effect of the binding restrictions and an indirect effect that is due to investors endogenizing expected future binding restrictions when investing their money. Further, we find that live funds exhibit a concave flow-performance relation due to stricter flow restrictions than defunct funds, which display a convex relation. Finally, we find that money is “smart,” that is, fund flows predict future hedge fund performance; however, this “smart money” effect is eliminated among funds with greater share restrictions.

hedge fund flows, share restrictions, asset illiquidity, life/defunct funds, smart money effect

Abstract:
We present hedge fund performance estimates that adjust for stale prices, Fama-French risk factors and Skewness. We contrast these new performance estimates with traditional performance measures. Using three-factor models to adjust for staleness in prices and to incorporate Fama-French factors along with the Harvey-Siddique (2000) two-factor model that incorporates Skewness, we find that for the period 1990-2003, all hedge fund categories achieve above average performance when measured against an aggregate market index. More significantly, however, when we estimate performance at the individual hedge fund level, we discover that only 40 to 47% of the funds are shown to achieve an above average performance over that time period depending on the model used. These results have important implications for investors, endowments and pensions when they choose hedge fund managers.

Hedge funds, Skewness, Coskewness, Performance

Abstract:
We examine whether the increase in the flow of capital to hedge funds over the period 1994-2005 had a negative impact on performance. More specifically, we study the relative performance of small versus large funds for each of the hedge fund strategies. Our results indicate that on an absolute return basis, small funds outperform large funds. On a risk-adjusted return basis, however, we find that large funds outperform small funds, and that large funds are also shown to hold less liquid assets and take on less systematic and idiosyncratic risk than small funds. Further, funds that experience positive liquidity shocks generally outperform those that experience negative liquidity shocks. We also find evidence that hedge fund managers that are aggressive in dealing with liquidity shocks perform better than hedge fund managers that are conservative in dealing with liquidity shocks.

Hedge funds, Liquidity, Size, Strategy, Performance

Abstract:
The mutual fund merger is neither a rare nore recent phenomenon. During the period 1962-1999, one out of ever six open-end equity funds were merged out of business. Interestingly, the distribution of equity fund mergers clusters in the 1970s when volatile stock markets have a great adverse impact on the industry and in the 1990s when the industry grows rapidly with bullish stock markets. This paper investigates the determinants and consequences of mutual fund mergers. I hypothesize that mutual fund mergers play two roles in the fund dynamics - eliminating inefficient funds and supporting the growth of well-performing funds. Using a sample of 604 equity fund mergers from CRSP, I find that the acquired funds are small, underperform persistently, and experience net outflows. Logit regression results further show that funds with these attributes are more likely to be taken over. Acquiring funds' performance is above average in the pre-merger period, but deteriorates after mergers. I find some evidence that funds merge to exploit the economies of scale in fund management. Compared to acquired funds, liquidated funds are tiny and even younger. In conclusion, mutual fund mergers provide an exit mechanism for funds of small size or with inferior growth opportunity.

Mutual funds, mergers

Abstract:
We present hedge fund performance estimates that adjust for stale prices, Fama-French risk factors and skewness. We contrast these new performance estimates with traditional performance measures. Using three-factor models to adjust for staleness in prices and to incorporate Fama-French factors along with the Harvey-Siddique (2000) two-factor model that incorporates skewness, we find that for the period 1990-2003, all hedge fund categories achieve above average performance when measured against an aggregate market index. More significantly, however, when we estimate performance at the individual hedge fund level, we discover that only 40 to 47% of the funds are shown to achieve an above average performance over that time period depending on the model used. These results have important implications for investors, endowments and pensions when they choose hedge fund managers.