Fund Investment Styles Research Articles

Ethical investing in Australia: Is there a financial penalty?

This study provides new evidence on the performance and investment style of retail ethical funds in Australia. By applying a conditional multi-factor model and after controlling for investment style, time-variation in betas and home bias, we observe no evidence of significant differences in risk-adjusted returns between ethical and conventional funds during 1992–2003. This result however is sensitive to the chosen time period. During 1992–1996 domestic ethical funds under-performed their conventional counterparts significantly, whereas during 1996–2003 ethical funds matched the performance of conventional funds more closely. This suggests that ethical mutual funds underwent a catching up phase, before delivering returns similar to those of conventional mutual funds.

The Relation of the Disposition Effect to Mutual Fund Trades and Performance

We document that, on average, U.S. equity mutual funds prefer realizing capital losses rather than capital gains. A substantial fraction of the sample, however, exhibits the opposite tendency of realizing gains more readily than losses. The documented tendency for this subset appears to be due to the disposition effect. When funds experience outflows and are managed by teams of portfolio managers, they appear more susceptible to sell disproportionately more winners than losers. Disposition-driven behavior affects mutual fund investment styles, causing lower market betas and characteristics of value-oriented and short-term contrarian styles but does not affect mutual fund performance.

International evidence on ethical mutual fund performance and investment style

Using an international database containing 103 German, UK and US ethical mutual funds we review and extend previous research on ethical mutual fund performance. By applying a Carhart multi-factor model [Carhart, Journal of Finance 57 (1997) 57] we overcome the benchmark problem most prior ethical studies suffered from. After controlling for investment style, we find no evidence of significant differences in risk-adjusted returns between ethical and conventional funds for the 1990–2001 period. Our results also suggest that ethical mutual funds underwent a catching up phase, before delivering financial returns similar to those of conventional mutual funds. Finally, our performance estimates are robust to the inclusion of ethical indexes, which, surprisingly, are not incrementally capable of explaining ethical mutual fund return variation.

Ethical Investing in Australia: Is there a Financial Penalty?

This study provides new evidence on the performance and investment style of retail ethical funds in Australia. By applying a conditional multi-factor Carhart (1997) model, we solve the benchmark problem most prior ethical studies suffered from. After controlling for investment style, time-variation in betas, bond exposure and home bias, we observe no evidence of significant differences in risk-adjusted returns between ethical and conventional funds during the 1992-2003 period. This result however is sensitive to the chosen time period. During 1992-1996, domestic ethical funds under-perform their conventional counterparts significantly. During 1996-2003, the ethical funds match the performance of conventional funds more closely. This suggests there is a learning effect for the relatively young ethical investment industry.

Improving Fund Risk Management by Using New Software Tools Technology

This paper introduces a new MATLAB-based toolbox for Computer Aided mutual fund risk evaluation. In the age of computerized trading, financial services companies and independent investors must quickly investigate fund investment style and market risk. The Fund Risk toolbox is a financial software that includes a set of functions based on value at risk (VaR) and expected tail loss (ETL) methodology for graphical presentation of risk forecasts, evaluation of different risk models and identification of fund investment style. The sample of historical data can be divided to an estimation rolling window and the back-testing period. MATLAB?s vast built-in mathematical and financial functionality along with the fact that is both an interpreted and compiled programming language make this toolbox easily extendable by adding new complicated risk models with minimum programming effort.

Detecting Management Behaviour by Analyzing Mutual Fund Returns: A Case Study

We compare the results from dynamic return-based style analysis with analyst reports about manager behaviour in the Fidelity Magellan Fund. We observe that much information about the fund's investment style can be gathered from investment returns only. We also compare the results from our dynamic model with models using macro-economic information and find that the former are smoother and hence better approximate a dynamic style analysis. Qualitative analyses (usually built on actual portfolio holdings) provide additional insights, but are generally more time-consuming, especially for a large universe of mutual funds.

Data Envelopment Analysis of Morningstar's Large-Cap Mutual Funds

The main purpose of this study is to identify the large-cap mutual funds in the Morningstar 500 that are efficient or inefficient as determined by data envelopment analysis (DEA). The second purpose is to identify the financial variables that differ significantly between efficient and inefficient funds and determine the nature of these relationships. There are identified input/output and profile variables that are significantly different between the DEA performance-efficient and inefficient large-cap mutual funds. The variables associated with efficient funds are relatively conservative in nature, not aggressive, consistent with a characterization of the investment style of large-cap DEA performance-efficient funds as predominantly value rather than growth.

Evaluating mutual funds in an emerging market: factors that matter to financial advisors

Growth, both in terms of size and choice, in the mutual fund industry among emerging markets has been impressive. However, mutual fund research in emerging markets hardly exists. This paper intends to fill this gap. In particular, the paper surveys the relative importance of factors considered important in the selection of mutual funds by financial advisors in emerging markets. Our survey focuses on Malaysia where the mutual industry started in the 1950s but only gained importance in the 1980s with the establishment of a government initiated programme. The results of our survey point to three important factors which dominate the choice of mutual funds. These are consistent past performance, size of funds and costs of transaction. Factors which relate to fund managers and investment style are not considered to be relatively important. With the impending liberalization of the financial markets in the developing world, our findings would assist those international funds that are considering expanding their operations into these emerging markets.

On Mutual Fund Investment Styles

On Mutual Fund Investment Styles

Do hedge funds add value to a passive portfolio? Correcting for non-normal returns and disappearing funds

Hedge funds have increased their assets under management rapidly in the last few years, partly owing to increasing inflows from large institutional investors such as pension funds and endowment funds. Not surprisingly hedge funds have also received increasing attention from the academic community. Non-linear factor models and option strategies have been used in the literature to explain hedge fund returns (see Fung and Hsieh, 2001; Agarwal and Naik, 2001; Mitchell and Pulvino, 2001; Amin and Kat, 2002). These papers provide insight into the risk involved in investing in hedge funds, and they are beneficial in developing benchmarks for hedge fund investment styles.

On Mutual Fund Investment Styles

Most mutual funds adopt investment styles that cluster around a broad market benchmark. Few funds take extreme positions away from the index, but those who do are more likely to favor growth stocks and past winners. The bias toward glamour and the tendency of poorly performing value funds to shift styles may reflect agency and behavioral considerations. After adjusting for style, there is evidence that growth managers on average outperform value managers. Though a fund’s factor loadings and its portfolio characteristics generally yield similar conclusions about its style, an approach using portfolio characteristics predicts fund returns better.

Hedge Funds and Hope

The long bull market left many with significant assets to invest, not to mention higher return expectations. Hedge funds have had explosive growth because they offer to satisfy these expectations. Return data from hedge funds of funds, across various hedge fund investment styles, suggest that this perception is not based on anecdotes. A closer examination of the return data and its distributional properties reveals a less sanguine picture. The author argues that a prototypical hedge fund has properties that are attractive and should be part of a sensible portfolio. He then describes adjustments to returns and portfolio construction techniques to account for the special features of hedge funds. It is shown that the proportion of a prudent portfolio invested in hedge funds is much lower than naive analysis would suggest.

Staying the Course: The Impact of Investment Style Consistency 
 on Mutual Fund Performance

While a mutual fund's investment style influences the returns it generates, little is known about how a manager's execution of the style decision might affect performance. Using multivariate techniques for measuring the consistency of a portfolio's investment mandate, we demonstrate that more style-consistent funds tend to produce higher total and relative returns than less consistent funds, after controlling for past performance and portfolio turnover. These findings are robust across fund investment style classifications, the return measurement period, and the model used to calculate expected returns. We document a positive relationship between measures of fund style consistency and the persistence of its future performance, net of momentum and past performance effects. We conclude that the decision to maintain a consistent investment style is an important aspect of the portfolio management process.

Explaining Hedge Fund Investment Styles by Loss Aversion: A Rational Alternative

Recent research reveals that hedge fund returns exhibit a range of different, possibly non-linear pay-off patterns. It is difficult to qualify all these patterns simultaneously as being rational in a traditional framework for optimal financial decision making. In this paper we present a simple model based on loss aversion that can accommodate for all of these pay-off structures in one unifying framework. We provide evidence that loss-aversion is a likely assumption for management as well as investor preferences. Following the current empirical literature, we solve a static asset allocation problem that includes a nonlinear instrument. We show analytically that four different pay-off functions may be rationally optimal. The key parameter in determining which of these four to choose in a specific setting, is the financial planner's surplus. The notion of surplus connects hedge fund manager's incentive schemes with the idea of mental accounting as proposed in recent behavioral finance research.

International Evidence on Ethical Mutual Fund Performance and Investment Style

Using an international database containing 103 German, UK and US ethical mutual funds we review and extend previous research on ethical mutual fund performance. By applying a multi-factor Carhart (1997) model we solve the benchmark problem most prior ethical studies suffered from. After controlling for investment style, we find little evidence of significant differences in risk-adjusted returns between ethical and conventional funds for the 1990-2001 period. Introducing time-variation in betas however leads to a significant under-performance of domestic US funds and a significant out-performance of UK ethical funds, relative to their conventional peers. Finally, we differentiate previous results by documenting a learning effect. After a period of strong under-performance, older ethical funds finally are catching up, while younger funds continue to under-perform both the index and conventional peers.

Assessing Market Risk for Hedge Funds and Hedge Fund Portfolios

The author suggests an empirical model to analyze the investment style of individual hedge funds and fund of funds. This approach is based on a mixture of the style analysis approach suggested by Sharpe [1988], the factor push approach used in stress testing, and historical simulation. The parameter estimates from this model are inputs in the Value‐at‐Risk analysis for a sample of 2,934 funds over the 1994–2000 period. The in‐sample and out‐of‐sample results suggest that the proposed approach is useful and may constitute a valuable tool for assessing the investment style and risk of hedge funds.

Assessing Market Risk for Hedge Funds and Hedge Funds Portfolios

We suggest an empirical model to analyze the investment style of individual hedge funds and funds of funds. Our approach is based on a mixture of the style analysis approach suggested by Sharpe (1988), the factor push approach used in stress testing, and historical simulation. An interesting and straightforward extension of this model is the estimation of value-at-risk (VaR) figures. This extension is tested using a very intuitive implementation over a large sample of 2,934 hedge funds over the 1994-2000 period. Both the in-the-sample and the out-of-sample results suggest that the proposed approach is useful and may constitute a valuable tool for assessing the investment style and risk of hedge funds.

Hedge Funds and Commodity Fund Investments in Bull and Bear Markets

This study examines the performance of sixteen different hedge fund and commodity fund investment styles during rising and falling stock prices over the period 1990:01 through 1998:08. Since a primary motivation for investing in hedge funds and commodity funds is to diversify against falling stock prices, it is important to examine the performance of these funds during bear stock markets. The study evaluates hedge funds and commodity funds both as stand-alone assets and as portfolio assets, and in both bull and bear stock markets. In addition, it utilizes the Sharpe ratio as well as alternative safety-first performance criteria to evaluate the funds. We conclude that commodity funds generally provide greater downside protection than do hedge funds. Commodity funds have higher returns in bear markets than do hedge funds, and generally have an inverse correlation with stock returns in bear markets, while hedge funds typically exhibit a higher positive correlation with stock returns in bear markets than in bull markets. However, three hedge fund styles - market-neutral, event-driven, and global macro - provide fairly good downside protection while still providing more attractive returns over all markets than do commodity funds.