Downside Risk Timing by Mutual Funds

41 Pages Posted: 1 Sep 2015

See all articles by Andriy Bodnaruk

Andriy Bodnaruk

University of Illinois at Chicago

Bekhan Chokaev

Russian Presidential Academy of National Economy and Public Administration (RANEPA); Gaidar Institute for Economic Policy

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management; Russian Presidential Academy of National Economy and Public Administration (RANEPA); Centre for Economic Policy Research (CEPR)

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Date Written: August 31, 2015

Abstract

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

Bodnaruk, Andriy and Chokaev, Bekhan and Simonov, Andrei, Downside Risk Timing by Mutual Funds (August 31, 2015). Available at SSRN: https://ssrn.com/abstract=2654055 or http://dx.doi.org/10.2139/ssrn.2654055

Andriy Bodnaruk (Contact Author)

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

Bekhan Chokaev

Russian Presidential Academy of National Economy and Public Administration (RANEPA) ( email )

Vernadskogo Prospect 82
Moscow, 119571
Russia

Gaidar Institute for Economic Policy

Gazetniy Lane 3-5
Moscow, 125993
Russia

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management ( email )

645 N. Shaw Lane, 321 Eppley Center
East Lansing, MI 48824-1122
United States

HOME PAGE: http://www.andreisimonov.com

Russian Presidential Academy of National Economy and Public Administration (RANEPA) ( email )

Vernadskogo Prospect 82
Moscow, 119571
Russia

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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