Can Institutional Investors Outperform the Market? Evidence from the Israeli Market

Abstract

In this paper, we show that institutional investors, like pension funds, may outperform standard market portfolio benchmarks. These results agree with contemporary research on pension funds’ performance. Yet, the current research does not explain why do pension funds are able to outperform the benchmark while mutual funds cannot. We use an Israeli database. The Israeli regulator compels pension funds to file comprehensive monthly reports. This creates a unique database of data about Israeli pension funds. Employing this database, we find that funds’ outperformance is significantly mitigated when we apply APB (Active Peer Benchmark), which was not used in previous works. We are also able to correlate the residual alpha (the risk adjusted abnormal return) to illiquidity factors and question what the hidden risks behind pension funds outperformance may be.