Double or Nothing: Patterns of Equity Fund Holdings and Transactions

46 Pages Posted: 11 Jul 2005  

Stephen J. Brown

New York University - Stern School of Business

Peter L. Swan

University of New South Wales (UNSW Australia); Financial Research Network (FIRN)

Onno W. Steenbeek

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); APG All Pensions Group

David R. Gallagher

Macquarie Graduate School of Management; Capital Markets CRC Limited

Date Written: February 2, 2005

Abstract

Prospect theory of Kahneman and Tversky (1979) suggests that traders will typically lock in gains and gamble on losses. In extreme situations such behavior can lead to significant downside risk for fund investors. Weisman (2002) uses the term informationless investing to describe this behavior, and argues that these strategies are peculiar to the asset management industry in general, and the hedge fund industry in particular and that these strategies can produce the appearance of return enhancement without necessarily providing any value to an investor. We devise a simple procedure to determine whether a given pattern of trading is consistent with informationless investing and apply it to a unique database of daily transactions and holdings of a set of thirty nine successful Australian equity managers. While this pattern of trading does seem to characterize the portfolios of some of the largest funds in Australia, this phenomenon is limited to positions taken in individual securities within large and well diversified funds. For this reason the negative consequences for fund investors appear to be limited.

Keywords: Prospect Theory, Disposition Effect, Risk management; Performance evaluation; Window dressing

JEL Classification: G23

Suggested Citation

Brown, Stephen J. and Swan, Peter L. and Steenbeek, Onno W. and Gallagher, David R., Double or Nothing: Patterns of Equity Fund Holdings and Transactions (February 2, 2005). EFA 2005 Moscow Meetings Paper. Available at SSRN: https://ssrn.com/abstract=555423 or http://dx.doi.org/10.2139/ssrn.555423

Stephen J. Brown (Contact Author)

New York University - Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0306 (Phone)
212-995-4233 (Fax)

Peter Lawrence Swan

University of New South Wales (UNSW Australia) ( email )

School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
Australia
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)

HOME PAGE: http://https://www.business.unsw.edu.au/our-people/peterswan

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Onno W. Steenbeek

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

Dept. of Finance, H14-1
P.O. Box 1738
3000 DR Rotterdam, 3000DR
Netherlands
+31-10-4081400 (Phone)
+31-10-4089165 (Fax)

HOME PAGE: http://people.few.eur.nl/steenbeek/

APG All Pensions Group ( email )

Gustav Mahlerplein 3
P.O. Box 75283
1070 AG Amsterdam
Netherlands
+31-20-6049122 (Phone)
+31-20-4059176 (Fax)

HOME PAGE: http://www.apg.nl

David R. Gallagher

Capital Markets CRC Limited ( email )

GPO Box 970
55 Harrington Street
Sydney, NSW 2001
Australia

Macquarie Graduate School of Management ( email )

MGSM
99 Talavera Road
Macquarie Park, NSW 2109
Australia

HOME PAGE: http://www.mgsm.edu.au

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