On this page, you will find a carefully curated list of papers published in the last five years related to the asset management industry, which I believe to be relevant. Additionally, we have included valuable industry data sources at the bottom of the page.
Recent Academic Paper
2023
2022
What Do Mutual Fund Investors Really Care About? (Ben-David et al.)
Abstract: We show that mutual fund investors rely on simple signals and likely do not engage in sophisticated learning about managers’ alpha as widely believed. Simplistic performance chasing best explains aggregate flows to the mutual fund space and flows across funds. These results hold for both actively managed and passive index funds. Empirical patterns commonly interpreted as reflecting learning about managerial skill also appear in falsification tests and are mechanical. Our results are consistent with the view that, on average, households are homo sapiens with limited financial sophistication rather than hyperrational alpha-maximizing agents, as often assumed in the literature.
The Performance of Hedge Fund Performance Fees. (Ben-David et al.)
Abstract: Performance-based fees in asset management contribute to the growing cost of financial intermediation. But how well do these fees align the long-run outcomes of fund managers and investors? In a large 22-year sample of hedge funds, we find that 60% of the gains on which incentive fees are paid are eventually offset by losses. As a result, the effective incentive fee rate is 50% vis-a-vis the nominal 20% rate. Overall, hedge fund fees consume 64% of the gross returns on investors’ capital and are only weakly correlated with actual long-run performance in the cross-section of funds.
On Index Investing. (Coles et al.)
Abstract: We empirically examine the effects of index investing using predictions derived from a Grossman-Stiglitz framework. An exogenous increase in index investing leads to lower information production as measured by Google searches, EDGAR views, and analyst reports, yet price informativeness remains unchanged. These findings are consistent with an equilibrium in which investors choose to gather private information whenever it is profitable. As index investing increases, there are fewer privately-informed active investors (so overall information production drops), but the mix of investors adjusts until the returns to active investing are unchanged. As a result, passive investing does not undermine price efficiency.
2021
Hedge Fund Performance: Are Stylized Facts Sensitive to Which Database One Uses? (Joenväärä et al.)
Abstract: This paper proposes a novel database merging approach and re-examines the fundamental questions regarding hedge fund performance. Before drawing conclusions about fund performance, we form an aggregate database by exploiting all available information across and within seven commercial databases so that the widest possible data coverage is obtained and the effect of data biases is mitigated. Average performance is significantly lower but more persistent when these conclusions are inferred from the aggregate database than from some of the individual commercial databases. Although hedge funds deliver performance persistence, the average fund does not deliver significant risk-adjusted net-of-fee returns while the gross-of-fee returns remain significantly positive. Consistent with previous literature, we find a significant association between fund characteristics related to share restrictions as well as compensation structure and risk-adjusted returns.
The Big Three and Corporate Carbon Emissions Around the World. (Azar et al.)
Abstract: This paper examines the role of the “Big Three” (i.e., BlackRock, Vanguard, and State Street Global Advisors) on the reduction of corporate carbon emissions around the world. Using novel data on engagements of the Big Three with individual firms, we find evidence that the Big Three focus their engagement effort on large firms with high CO2 emissions in which these investors hold a significant stake. Consistent with this engagement influence being effective, we observe a strong and robust negative association between Big Three ownership and subsequent carbon emissions among MSCI index constituents, a pattern that becomes stronger in the later years of the sample period as the three institutions publicly commit to tackle Environmental, Social, and Governance (ESG) issues.
Marketing Mutual Funds. (Roussanov et al.)
Abstract: Marketing and distribution expenses are responsible for about one-third of the cost of active management in the mutual fund industry. Estimating a structural model with costly investor search and learning about fund skill, we find that marketing is nearly as important as performance and fees in determining fund size. Eliminating marketing substantially improves welfare: capital shifts toward cheaper funds and competition decreases fees; active funds shrink and capital allocation becomes more closely aligned with skill. Declining investor search costs imply a reduction in marketing expenses and management fees as well as a shift toward passive investing, as observed empirically.
Obfuscation in Mutual Funds. (DeHaan et al.)
Abstract: Mutual funds hold 32% of the U.S. equity market and comprise 58% of retirement savings, yet retail investors consistently make poor choices when selecting funds. Theory suggests poor choices are partially due to fund managers creating unnecessarily complex disclosures and fee structures to keep investors uninformed and obfuscate poor performance. An empirical challenge in investigating this “strategic obfuscation” theory is isolating manipulated complexity from complexity arising from inherent differences across funds. We examine obfuscation among S&P 500 index funds, which have largely the same regulations, risks, and gross returns but charge widely different fees. Using bespoke measures of complexity designed for mutual funds, we find evidence consistent with funds attempting to obfuscate high fees. This study improves our understanding of why investors make poor mutual fund choices and how price dispersion persists among homogeneous index funds. We also discuss insights for mutual fund regulation and academic literature on corporate disclosures.
2020
The Hedge Fund Industry Is Bigger (and Has Performed Better) Than You Think. (Barth et al.)
Abstract: The article highlights the substantial growth and superior performance of the hedge fund industry. Despite misconceptions, the industry has expanded significantly, managing larger assets than commonly perceived, and it has often outperformed traditional investment options. This article underscores the importance of recognizing the significant role hedge funds play in the financial markets.
Measuring Innovation and Product Differentiation: Evidence from Mutual Funds. (Kostovetsky et al.)
Abstract: We study innovation and product differentiation using a uniqueness measure based on textual analysis of prospectuses. We find that small and start-up families have higher start rates than larger families, and their products are more unique. Unique strategies attract more inflows in the first three years, and investors respond more to text-based uniqueness than other measures such as holdings or returns uniqueness. For established funds, word uniqueness has weak negative power for explaining returns, so investors in competitive equilibrium do not sacrifice much performance to get specialized products. Uniqueness attenuates the flow-performance relation, reducing the risk of investor outflows.
2019
Risk Adjustment in Private Equity Returns. (Korteweg et al.)
Abstract: This article reviews empirical methods to assess risk and return in private equity. I discuss data and econometric issues for fund-level, deal-level, and publicly traded partnerships data. Risk-adjusted return estimates vary substantially by method, time period, and data source. The weight of evidence suggests that, relative to a similarly risky investment in the stock market, the average venture capital (VC) fund earned positive risk-adjusted returns before the turn of the millennium, but net-of-fee returns have been zero or even negative since. Average leveraged buyout (BO) investments have generally earned positive risk-adjusted returns both before and after fees, compared with a levered stock portfolio. Based on an expanded set of risk factors from the literature, VC resembles a small-growth investment, while BO loads mostly on value. I also discuss the empirical evidence on liquidity and idiosyncratic volatility risks.
Regulations and Brain Drain: Evidence from Wall Street Star Analysts’ Career Choices. (Guan et al.)
Abstract: The Global Settlement, along with related regulations in the early 2000s, prohibits the use of investment banking revenue to fund equity research and compensate equity analysts. We find that all-star analysts from investment banks are more likely to exit the profession or move to the buy side after the regulations. The departed star analysts’ earnings revisions and stock recommendations are more informative than those of the remaining analysts who followed the same companies. To the extent that star analysts are superior to their nonstar counterparts in terms of research ability and ability to inform the market, the exit of star analysts represents a brain drain in the sell-side equity research industry. These results are consistent with the view that the regulations introduced to protect equity investors have unintended adverse effects on the investors due to a brain drain in investment banks.
2018
Informative Fund Size, Managerial Skill, and Investor Rationality. (Zhu)
Abstract: This paper considers the nature of returns to scale in active management following Pástor et al. (2015) who fail to establish diseconomies of scale at the fund level. Using an enhanced empirical strategy, we find a significant negative impact of fund size on performance. This empirical evidence indicates that fund alpha and fund size are not independent entities. Consequently, skill, rather than being measured by the fund alpha, should be measured by the value that a fund extracts from capital markets. We also show that there exist sophisticated investors who correctly exploit positive net present value investment opportunities.
Asset Management Within Commercial Banking Groups: International Evidence. (Ferreira et al.)
Abstract: We study the performance of equity mutual funds run by asset management divisions of commercial banking groups using a worldwide sample. We show that bank-affiliated funds underperform unaffiliated funds by 92 basis points per year. Consistent with conflicts of interest, the underperformance is more pronounced among those affiliated funds that overweight the stock of the bank's lending clients to a great extent. Divestitures of asset management divisions by banking groups support a causal interpretation of the results. Our findings suggest that affiliated fund managers support their lending divisions’ operations to reduce career concerns at the expense of fund investors.
Sharpening the Arithmetic of Active Management. (Pedersen)
Abstract: I challenge Sharpe’s (1991) famous equality that “before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar.” This equality is based on the implicit assumption that the market portfolio never changes, which does not hold in the real world because new shares are issued, others are repurchased, and indices are reconstituted so even “passive” investors must regularly trade. Therefore, active managers can be worth positive fees in aggregate, allowing them to play an important role in the economy: helping allocate resources efficiently. Passive investing also plays a useful economic role: creating low-cost access to markets.
Are Mutual Fund Managers Paid for Investment Skill? (Ibert et al.)
Abstract: Compensation of mutual fund managers is paramount to understanding agency frictions in asset delegation. We collect a unique registry-based dataset on the compensation of Swedish mutual fund managers. We find a concave relationship between pay and revenue, in contrast to how investors compensate the fund company (firm). We also find a surprisingly weak sensitivity of pay to performance, even after accounting for the indirect effects of performance on revenue. Firm-level fixed effects, revenues, and profits add substantial explanatory power for compensation.
How Does Hedge Fund Activism Reshape Corporate Innovation? (Brav et al.)
Abstract: This paper studies how hedge fund activism impacts corporate innovation. Firms targeted by activists improve their innovation efficiency over the five-year period following hedge fund intervention. Despite a tightening in research and development (R&D) expenditures, target firms increase innovation output, as measured by both patent counts and citations, with stronger effects among firms with more diversified innovation portfolios. Reallocation of innovative resources, redeployment of human capital, and change to board-level expertise all contribute to improve target firms’ innovation. Additional tests help isolate the effect of intervention from alternative explanations, including mean reversion, sample attrition, voluntary reforms, or activist stock-picking.
Data & Important Sources
United Nations, 2023. “SDG Indicators.” Sustainable Development Goal (website). https://unstats.un.org/sdgs/indicators/indicators-list/.Bank of International Settlements (BIS) is an international financial institution that serves as a bank for central banks worldwide. It facilitates cooperation and collaboration among central banks and monetary authorities, providing a platform for them to exchange information, conduct transactions, and coordinate monetary policies. The BIS plays a crucial role in promoting global monetary and financial stability by providing research, analysis, and policy recommendations on matters related to monetary policy, financial regulation, and banking supervision.
Burgiss is a leading provider of investment data and analytics solutions for the private capital market industry, including private equity, venture capital, real estate, and other alternative investments. The company offers a comprehensive platform that allows institutional investors, fund managers, and consultants to access, analyze, and monitor investment performance and risk. Burgiss plays a pivotal role in helping the industry stakeholders make informed investment decisions and manage their portfolios effectively in the complex world of private capital markets.
European Securities and Markets Authority (ESMA) is an independent European Union (EU) authority responsible for safeguarding the stability and integrity of financial markets in the EU. It plays a crucial role in supervising and regulating securities markets, including credit rating agencies, trade repositories, and other market participants. ESMA works to ensure consistent and harmonised regulation across EU member states to enhance investor protection and promote fair and transparent financial markets.
European Finance Association (EFA) is a professional organisation dedicated to advancing the field of finance in Europe. It serves as a platform for finance researchers, practitioners, and academics to collaborate, exchange ideas, and disseminate knowledge related to finance and financial markets. EFA organises annual conferences, publishes research papers, and promotes the development of finance education and research across Europe.
Federal Reserve Economic Data (FRED) s an extensive online database maintained by the Federal Reserve Bank of St. Louis. It provides access to a wide range of economic and financial data, including economic indicators, interest rates, inflation measures, exchange rates, and more. FRED is a valuable resource for economists, researchers, policymakers, and the general public to track and analyse economic trends, make informed decisions, and conduct economic research.
Financial Conduct Authority (FCA) is a regulatory authority in the United Kingdom responsible for supervising and regulating financial markets and financial services firms. Its mission is to protect consumers, ensure market integrity, and promote competition in the financial sector. The FCA achieves these objectives through regulatory oversight, rulemaking, enforcement actions, and by setting standards for conduct and prudential regulation within the UK financial industry.
Financial Stability Board (FSB) is an international organisation that was established to promote and coordinate global financial stability. It was formed in response to the 2008 financial crisis. The FSB conducts assessments of the global financial system, makes recommendations to address vulnerabilities, and monitors the implementation of these measures by member countries and financial institutions to safeguard the stability of the international financial system.
International Capital Market Association (ICMA) is a prominent trade association representing the global capital markets industry. It brings together financial institutions, including banks, securities firms, and other market participants, to promote best practices and advocate for sound regulatory policies in the capital markets. ICMA plays a key role in fostering transparency, efficiency, and integrity within the international fixed income, repo, and currency markets.
International Investment Funds Association (IIFA) is a global organisation that represents the interests of investment funds and asset management companies. It serves as a platform for discussions and collaboration among industry participants, including fund managers, regulators, and other stakeholders. IIFA works to promote best practices, share industry knowledge, and advocate for policies that support the growth and stability of the investment fund industry worldwide.
International Monetary Fund (IMF) is an international financial organization established to promote global monetary cooperation, exchange rate stability, balanced trade, and sustainable economic growth. It provides financial assistance and policy advice to its member countries facing balance of payments problems, helping them stabilize their economies. The IMF conducts economic surveillance, research, and analysis to monitor and address economic challenges and crises on a global scale.
International Association for Quantitative Finance (IAQF) is a professional organization that focuses on the field of quantitative finance. It provides a platform for researchers, practitioners, and academics to collaborate and exchange ideas related to quantitative methods in finance. IAQF hosts conferences, publishes research papers, and offers educational programs to advance the understanding and application of quantitative techniques in the financial industry.
International Organization of Securities Commissions (IOSCO) is a global association of securities regulators from various countries and jurisdictions. Its primary mission is to promote and develop international standards and best practices for securities regulation and oversight. IOSCO plays a crucial role in facilitating cooperation and information sharing among securities regulators worldwide, aiming to enhance the integrity, transparency, and efficiency of global financial markets.
Investment Company Institute (ICI) is a leading trade association representing the mutual fund and exchange-traded fund (ETF) industry in the United States. It serves as a voice for investment companies and plays a key role in advocating for policies and regulations that promote the interests of mutual funds, ETFs, and their investors. The ICI provides research, data, and industry insights to its members and the broader financial community to support the growth and integrity of the investment company industry.
Investment & Pensions Europe (IPE) is a publication that primarily serves the institutional investment industry, including pension funds, asset managers, and other financial professionals. It provides news, analysis, and insights related to investments, pension management, and institutional asset allocation.
Organisation for Economic Co-operation and Development (OECD) is an international organisation composed of 38 member countries, mostly high-income nations, that collaborate on economic policy and social issues. The OECD's mission is to promote economic growth, stability, and improved living standards across its member countries and beyond. It conducts research, publishes reports, and provides a platform for member nations to discuss and coordinate policies related to a wide range of areas, including taxation, education, healthcare, environmental sustainability, and trade.
Preqin is a leading data and research provider in the alternative assets industry, focusing on areas such as private equity, real estate, hedge funds, and infrastructure. It offers comprehensive information and analytics to assist investors, fund managers, and other financial professionals in making informed decisions within the alternative investment landscape. Preqin's services include data on fund performance, fundraising, investor profiles, and market trends, enabling its clients to track and analyze developments in the world of alternative investments.
U.S. Securities and Exchange Commission (SEC) is a federal regulatory agency responsible for overseeing and enforcing securities laws and regulations in the United States. Its primary mission is to protect investors, maintain fair and efficient markets, and facilitate capital formation. The SEC achieves its goals through various functions, including regulatory rule-making, enforcement of securities laws, oversight of financial markets and market participants, and investor education and protection initiatives.
Securities Industry and Financial Markets Association (SIFMA) is a prominent trade association representing various participants in the securities and financial markets industry in the United States. It includes a wide range of member firms, such as banks, broker-dealers, asset managers, and other financial institutions. SIFMA's primary objectives include advocating for policies and regulations that promote fair and efficient capital markets, providing industry research and insights, and fostering communication and collaboration among its members to enhance the functioning of the financial industry.
SWFI is an organization that provides research, data, and insights related to sovereign wealth funds (SWFs) and other institutional investors. It offers a comprehensive database of information on SWFs, pensions, endowments, and other large institutional investors, allowing market participants to better understand and track their investment activities and strategies. The SWFI plays a critical role in facilitating transparency and knowledge sharing within the global investment community, particularly in relation to sovereign wealth funds' activities and their impact on financial markets.
The Thinking Ahead Institute (TAI) is a global research and innovation hub focused on the asset management industry. It serves as a platform for financial institutions, pension funds, and asset managers to collaborate, share insights, and advance the practice of institutional investing. The Institute conducts research, produces publications, and hosts events to promote long-term thinking and responsible investment strategies within the financial sector.
World Bank is an international financial institution that provides loans, grants, and technical assistance to developing countries for projects that aim to reduce poverty, promote economic development, and improve infrastructure and public services. It consists of two main institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The World Bank's primary goal is to support sustainable and inclusive growth in developing nations by funding initiatives in areas like education, healthcare, agriculture, and infrastructure.
World Federation of Exchanges (WFE) is an international organization that brings together global stock exchanges and other financial market infrastructure providers. It serves as a platform for member exchanges to collaborate, share information, and advocate for policies that promote transparent, efficient, and secure financial markets worldwide. The WFE plays a pivotal role in fostering cooperation among exchanges, influencing regulatory standards, and advancing the development of financial markets on a global scale.