Risk Shifting and Mutual Fund Performance

56 Pages Posted: 20 Mar 2008 Last revised: 26 Nov 2010

Jennifer C. Huang

University of Texas at Austin - Department of Finance

Clemens Sialm

University of Texas at Austin - McCombs School of Business; National Bureau of Economic Research (NBER)

Hanjiang Zhang

Nanyang Technological University - Nanyang Business School

Multiple version iconThere are 2 versions of this paper

Date Written: November 22, 2010

Abstract

Mutual funds change their risk levels significantly over time. Risk shifting might be caused by ill-motivated trades of unskilled or agency-prone fund managers who trade to increase their personal compensation. Alternatively, risk shifting might occur when skilled fund managers trade to take advantage of their stock selection and timing abilities. This paper investigates the performance consequences of risk shifting and sheds light on the mechanisms and the economic motivations behind the risk shifting behavior. Using a holdings-based measure of risk shifting, we find that funds that increase risk perform worse than funds that keep stable risk levels over time, suggesting that risk shifting is either an indication of inferior ability or is motivated by agency issues.

Keywords: Risk Shifting, Mutual Fund Performance, Agency Issues, Style Drift

JEL Classification: G10, G11, G23

Suggested Citation

Huang, Jennifer C. and Sialm, Clemens and Zhang, Hanjiang, Risk Shifting and Mutual Fund Performance (November 22, 2010). McCombs Research Paper Series No. FIN-04-08. Available at SSRN: https://ssrn.com/abstract=1108734 or http://dx.doi.org/10.2139/ssrn.1108734

Jennifer Chunyan Huang

University of Texas at Austin - Department of Finance ( email )

McCombs School of Business, B6600
Austin, TX 78712
United States
512-232-9375 (Phone)
512-471-5073 (Fax)

Clemens Sialm (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

HOME PAGE: http://faculty.mccombs.utexas.edu/Clemens.Sialm/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hanjiang Zhang

Nanyang Technological University - Nanyang Business School ( email )

S3-B1A-05 Nanyang Avenue
Singapore, 639798
Singapore

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