The Folly of Hiring Winners and Firing Losers

2018 ◽  
Keyword(s):  
Standard Procedure ◽  
Expected Returns ◽  
Fund Managers ◽  
Security Selection ◽  
Strategy Performance ◽  
Manager Skill ◽  
Relative Valuation

The standard procedure of firing losing managers and hiring winning managers based on their past three-year performance leads to losses. Investors need to look forward—not just back—when allocating to fund managers by using a measure of expected fund returns that considers factor exposures, fees, manager skill in security selection, and factor expected returns estimated based on relative valuation. As investors and their consultants gain a better understanding of the predictive efficacy of relative valuations in factor and strategy performance, they gain an objective reason to avoid the blunders of performance chasing.

scholarly journals Implicit incentives for fund managers with partial information

2021 ◽  
Author(s):  
Flavio Angelini ◽  
Katia Colaneri ◽  
Stefano Herzel ◽  
Marco Nicolosi
Keyword(s):  
Asset Allocation ◽  
Partial Information ◽  
Market Price ◽  
Investment Strategy ◽  
Expected Returns ◽  
Martingale Method ◽  
Fund Manager ◽  
Market Price Of Risk ◽  
Fund Managers ◽  
Price Of Risk

AbstractWe study the optimal asset allocation problem for a fund manager whose compensation depends on the performance of her portfolio with respect to a benchmark. The objective of the manager is to maximise the expected utility of her final wealth. The manager observes the prices but not the values of the market price of risk that drives the expected returns. Estimates of the market price of risk get more precise as more observations are available. We formulate the problem as an optimization under partial information. The particular structure of the incentives makes the objective function not concave. Therefore, we solve the problem by combining the martingale method and a concavification procedure and we obtain the optimal wealth and the investment strategy. A numerical example shows the effect of learning on the optimal strategy.

Strategy-performance linkage: methodological refinements and empirical analysis

2016 ◽  
Vol 10 (3) ◽  
pp. 303-317 ◽  
Author(s):  
Jamil Anwar ◽  
SAF Hasnu
Keyword(s):  
Empirical Analysis ◽  
Standard Procedure ◽  
Strategic Orientation ◽  
Financial Data ◽  
Content Type ◽  
Significant Difference ◽  
Strategy Performance ◽  
And Performance ◽  
Miles And Snow ◽  
Over Time

Purpose Strategic typologies are applied to investigate strategy–performance relationship. The typology of Miles and Snow (1978) is one of them, but the methodology applied for identification of strategic types for archival financial data is questionable on three grounds: no standard procedure for categorization of strategic types; identification of reactor strategy is always ignored; and the behavior of firms’ strategic orientation over time is under-researched. Besides, the assumptions that viable strategies are expected to perform equally well, outperform reactors and distributed evenly are not overwhelmingly supported. The purpose of this paper is to address these issues. Design/methodology/approach A refined scoring methodology is developed and used for identification of all strategic types, including reactors, by investigating the consistency of the firms over time. Empirical analysis using seven years of data of 121 joint stock firms of the textile sector in Pakistan is performed to test the assumptions regarding presence, distribution and performance of strategic types. Findings There is significant difference in the distribution of the strategic types. Pure defenders and pure prospectors are non-existing, whereas a reasonable number of reactors are present. Overall difference in performance among strategies is generally insignificant and viable strategies outperformed reactors. The effect of size on performance is also insignificant. However, there is variation in performance of strategies with variation in size. Strategy is the better predictor of performance than size. Originality/value The transition of strategic stance of the firms over time and the identification of reactor strategy from archived financial data are the important outcomes of the proposed methodology. The proposed methodology can be used for any longitudinal study for identification of all possible strategic types and can also be used for any other typological research.

Market timing and selectivity performance of socially responsible funds

2015 ◽  
Vol 11 (2) ◽  
pp. 258-269 ◽  
Author(s):  
Praveen K. Das ◽  
S. P. Uma Rao
Keyword(s):  
Market Timing ◽  
Stock Selection ◽  
Socially Responsible ◽  
Content Type ◽  
Fund Managers ◽  
High Profile ◽  
Long Term Study ◽  
Timing Ability ◽  
Security Selection ◽  
Almost All

Purpose – The purpose of this paper is to examine the market timing and stock selection abilities of socially responsible (SR) mutual funds. Some high-profile SR fund managers try to embrace market timing and security selection plans to add value to the performance. Market timing relies on forecasting the equity market and shifting assets into or out of the market in anticipation of market movements. The selectivity measure assesses fund managers ability to select undervalued securities. Furthermore, the authors examine whether fund characteristics play any role in market timing and security selection ability. Design/methodology/approach – The authors use Treynor and Mazuy's’ (1966) and Henriksson and Mertons’ (1981) model to examine the market timing and security selection ability. The study uses a decade of monthly returns to examine the skills of fund managers in the SR industry for the period from July 2002 to June 2012. Findings – The main findings are that the managers – though not very successful – do indulge in stock selection and market timing activities. It was found that 48 funds have positive statistically significant stock selectivity coefficients and only a very small number of five funds with positive statistically significant market timing coefficients. Results suggest that there is a trade-off between the two activities. It was found that aggressive funds, funds with higher growth rate and riskier funds are more likely to engage in market timing rather than stock selection. Practical implications – The implication is that SR managers cannot achieve superior stock selection and market timing ability simultaneously. Risk-averting investors in SR funds expect SR behavior from the managers. This means that managers of SR funds, with very little evidence of market timing ability, may have to refrain from market timing of SR funds. Originality/value – Using a Morningstar dataset comprising almost all SR funds in existence as of June 2012, this is probably the most exhaustive long-term study to date on market timing and stock selection abilities of SR fund managers.

Benchmarking mutual fund alpha

2016 ◽  
Vol 31 (4) ◽  
pp. 227-239
Author(s):  
Qiang Bu
Keyword(s):  
Mutual Fund ◽  
Fund Performance ◽  
Excess Return ◽  
Market Models ◽  
Content Type ◽  
Fund Managers ◽  
The Difference ◽  
Manager Skill ◽  
Fund Investment ◽  
Manager Compensation

Purpose The standard market models assume that all investors are rational with the same level of risk aversion, whereas investors in the real world are neither rational nor homogeneous. This contrast makes these models inappropriate for evaluating manager skill. The purpose of this paper is to attempt to bridge the gap between model assumption and fund investment practice. Design/methodology/approach This study proposes a series of modified models using the excess return of peer funds to estimate fund alpha. In these models, the market excess return in the standard market models is replaced with the average excess return of bootstrapped funds. In addition, the author examines the reasons for the difference between the modified models and the standard models. Findings The modified models better explain the variation of fund returns, and they exhibit that a considerably higher percentage of funds can earn positive alpha, thus the skill of fund managers is underestimated based on the standard market models. Originality/value The proposed models provide a more reliable method for investors to identify skilled fund managers, and they can also serve as an objective benchmark in evaluating fund performance and in designing manager compensation packages.

Hedge Fund Manager Skill and Style-Shifting

2021 ◽  
Author(s):  
George J. Jiang ◽  
Bing Liang ◽  
Huacheng Zhang
Keyword(s):  
Hedge Funds ◽  
Hedge Fund ◽  
Abnormal Returns ◽  
Fund Managers ◽  
Timing Ability ◽  
Dynamic Strategy ◽  
Show Evidence ◽  
Style Shifting ◽  
Manager Skill ◽  
Investment Styles

Using a novel style identification procedure, we show that style-shifting is a dynamic strategy commonly used by hedge fund managers. Three quarters of hedge funds shifted their investment styles at least once over the period from January 1994 to December 2013. We perform empirical tests of two hypotheses for the motivations of hedge fund style-shifting, namely backward-looking and forward-looking hypotheses. We find no evidence that style-shifting funds are backward-looking. Instead, we show evidence that managers of style-shifting funds exhibit both style-timing ability and the skill of generating abnormal returns in new styles. The new styles that hedge funds shift to on average outperform their old styles by 0.76% and style-shifting funds on average outperform their new style benchmark by 1.10% over the subsequent 12-month horizon. Finally, we show that small funds, winner funds, and funds with net inflows are more likely to shift styles. This paper was accepted by David Simchi-Levi, finance.

scholarly journals Investing in Socially Responsible Mutual Funds

2021 ◽  
Author(s):  
Christopher C Geczy ◽  
Robert F Stambaugh ◽  
David Levin
Keyword(s):  
Mutual Funds ◽  
Pricing Models ◽  
Socially Responsible ◽  
Responsible Investment ◽  
Fund Managers ◽  
Market Index ◽  
Socially Responsible Mutual Funds ◽  
Manager Skill ◽  
The Cost ◽  
Stock Picking

Abstract We construct optimal portfolios of mutual funds whose objectives include socially responsible investment (SRI). Comparing portfolios of these funds to those constructed from the broader fund universe reveals the cost of imposing the SRI constraint on investors seeking the highest Sharpe ratio. This SRI cost crucially depends on the investor’s views about asset pricing models and stock-picking skill by fund managers. To an investor who strongly believes in the CAPM and rules out managerial skill, that is, a market index investor, the cost of the SRI constraint is typically just a few basis points per month, measured in certainty-equivalent loss. To an investor who still disallows skill but instead believes to some degree in pricing models that associate higher returns with exposures to size, value, and momentum factors, the SRI constraint is much costlier, typically by at least 30 basis points per month. The SRI constraint imposes large costs on investors whose beliefs allow a substantial amount of fund-manager skill, that is, investors who heavily rely on individual funds’ track records to predict future performance.

Evolution of the microstructure of Cu(Ti)/SiO2 layers annealed in NH3

1995 ◽  
Vol 53 ◽  
pp. 452-453
Author(s):  
J. Liu ◽  
N. D. Theodore ◽  
D. Adams ◽  
S. Russell ◽  
T. L. Alford ◽  
...  
Keyword(s):  
Thermal Stability ◽  
Titanium Nitride ◽  
Large Scale ◽  
Standard Procedure ◽  
Alloy Film ◽  
Electron Beam Evaporation ◽  
Copper Metallization ◽  
Nominal Composition ◽  
Ti Alloy ◽  
Thermally Grown

Copper-based metallization has recently attracted extensive research because of its potential application in ultra-large-scale integration (ULSI) of semiconductor devices. The feasibility of copper metallization is, however, limited due to its thermal stability issues. In order to utilize copper in metallization systems diffusion barriers such as titanium nitride and other refractory materials, have been employed to enhance the thermal stability of copper. Titanium nitride layers can be formed by annealing Cu(Ti) alloy film evaporated on thermally grown SiO2 substrates in an ammonia ambient. We report here the microstructural evolution of Cu(Ti)/SiO2 layers during annealing in NH3 flowing ambient.The Cu(Ti) films used in this experiment were prepared by electron beam evaporation onto thermally grown SiO2 substrates. The nominal composition of the Cu(Ti) alloy was Cu73Ti27. Thermal treatments were conducted in NH3 flowing ambient for 30 minutes at temperatures ranging from 450°C to 650°C. Cross-section TEM specimens were prepared by the standard procedure.

Are HOLZ lines kinematic in off-zone-axis orientation?

1993 ◽  
Vol 51 ◽  
pp. 692-693
Author(s):  
J. M. Zuo ◽  
A. L. Weickenmeier ◽  
R. Holmestad ◽  
J. C. H. Spence
Keyword(s):  
Structure Determination ◽  
Standard Procedure ◽  
High Order ◽  
Zone Axis ◽  
Great Promise ◽  
Line Position ◽  
Measured Intensity ◽  
Constant Intensity ◽  
Axis Orientation ◽  
Diffraction Condition

The application of high order reflections in a weak diffraction condition off the zone axis center, including those in high order laue zones (HOLZ), holds great promise for structure determination using convergent beam electron diffraction (CBED). It is believed that in this case the intensities of high order reflections are kinematic or two-beam like. Hence, the measured intensity can be related to the structure factor amplitude. Then the standard procedure of structure determination in crystallography may be used for solving unknown structures. The dynamic effect on HOLZ line position and intensity in a strongly diffracting zone axis is well known. In a weak diffraction condition, the HOLZ line position may be approximated by the kinematic position, however, it is not clear whether this is also true for HOLZ intensities. The HOLZ lines, as they appear in CBED patterns, do show strong intensity variations along the line especially near the crossing of two lines, rather than constant intensity along the Bragg condition as predicted by kinematic or two beam theory.

Sequential Difficulty Effects During Strategy Execution

2012 ◽  
Vol 59 (5) ◽  
pp. 295-301 ◽  
Author(s):  
Kim Uittenhove ◽  
Patrick Lemaire
Keyword(s):  
Computational Models ◽  
Preceding Trial ◽  
Human Cognition ◽  
Strategy Execution ◽  
Strategy Performance ◽  
Empirical Implications

In two experiments, we tested the hypothesis that strategy performance on a given trial is influenced by the difficulty of the strategy executed on the immediately preceding trial, an effect that we call strategy sequential difficulty effect. Participants’ task was to provide approximate sums to two-digit addition problems by using cued rounding strategies. Results showed that performance was poorer after a difficult strategy than after an easy strategy. Our results have important theoretical and empirical implications for computational models of strategy choices and for furthering our understanding of strategic variations in arithmetic as well as in human cognition in general.

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