Downside Risk Timing by Mutual Funds
41 Pages Posted: 1 Sep 2015
Date Written: August 31, 2015
We study whether mutual funds systematically manage downside risk of their portfolios in ways that improve their performance. We find that actively managed mutual funds on average possess positive downside risk timing ability. Funds investing in large-cap and value stocks have stronger downside risk timing skills. Managers adjust funds’ downside risk exposure in response to macroeconomic information. Funds more skilled in timing downside risk outperform those which are not by 13.8bp per month (or 1.67% annualized) unconditionally and by 48.7 bp per month (or 6.00% annualized) during recessions, and attract larger flows. For the fund with average AUM and fees, extra flows from high downside risk timing skills result in 160 thousand dollars of additional fee revenue per year.
Keywords: downside risk, market timing, mutual funds, risk management
JEL Classification: G10, G11
Suggested Citation: Suggested Citation