Does equity mutual fund factor-risk-shifting pay off? Evidence from the US

Purpose The purpose of this paper is to explore the motivation behind mutual funds’ risk shifting behavior by examining its impact on fund performance, while jointly considering fund managers’ compensation incentives and career concerns. Design/methodology/approach The study uses a sample of US actively managed equity funds over the period 1980-2010. A fund’s risk shifting is estimated as the difference between the fund’s intended portfolio risk in the second half of the year and the realized portfolio risk in the first half of the year. Using the state of the market to identify the dominating type of incentive that fund managers face, we examine the relationship between performance and risk shifting in a cross-sectional regression setting, using the Fama and MacBeth (1973) methodology. Findings The authors find that poorly performing (well performing) funds are likely to increase (decrease) their risk level in bull markets, while reducing (increasing) it during bear markets. Furthermore, we find that funds that increase risk underperform, while those that decrease their portfolio risk do not. In addition, we find that poorly performing funds that increase (or decrease) their risk underperform across bull and bear markets, while well performing funds that reduce risk during bull markets subsequently outperform. Originality/value The paper contributes to the literature on mutual fund risk shifting by providing evidence that the performance consequence of such behavior is dependent on the state of the market and on the funds’ past performance. The results suggest that loser funds tend to be agency prone or be managed by managers with inferior investment skill, and that winner funds exhibit superior investment ability during bull markets. The authors argue that both the agency and investment ability hypotheses are driving fund managers’ risk shifting behavior.

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Towards a goal programming methodology for constructing equity mutual fund portfolios

Journal of Asset Management ◽

10.1057/palgrave.jam.2240120 ◽

2004 ◽

Vol 4 (6) ◽

pp. 415-428 ◽

Cited By ~ 15

Author(s):

Konstantina Pendaraki ◽

Michael Doumpos ◽

Constantin Zopounidis

Keyword(s):

Goal Programming ◽

Mutual Fund ◽

Programming Methodology ◽

Equity Mutual Fund

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Does Skin in the Game Matter? Director Incentives and Governance in the Mutual Fund Industry

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109009990408 ◽

2009 ◽

Vol 44 (6) ◽

pp. 1345-1373 ◽

Cited By ~ 45

Author(s):

Martijn Cremers ◽

Joost Driessen ◽

Pascal Maenhout ◽

David Weinbaum

Keyword(s):

Significant Role ◽

Private Information ◽

Mutual Fund ◽

Fund Performance ◽

Incentive Structure ◽

Future Performance ◽

Economic Mechanisms ◽

Fund Industry ◽

Mutual Fund Industry ◽

Equity Mutual Fund

AbstractWe use a unique database on ownership stakes of equity mutual fund directors to analyze whether the directors’ incentive structure is related to fund performance. Ownership of both independent and nonindependent directors plays an economically and statistically significant role. Funds in which directors have low ownership, or “skin in the game,” significantly underperform. We posit two economic mechanisms to explain this relation. First, lack of ownership could indicate a director’s lack of alignment with fund shareholder interests. Second, directors may have superior private information on future performance. We find evidence in support of the first and against the second mechanism.

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