Mutual fund performance and changes in factor exposure

Abstract

In this article, we examine whether active mutual funds that markedly change their exposure to systematic risk factors subsequently outperform. We propose a new returns-based approach to assess the degree to which mutual funds adjust their risk exposure, with the benefit of not requiring periodically updated information related to funds' portfolio holdings. Applying this measure to active US mutual funds from 1990 to 2016, we provide evidence that mutual fund managers exhibiting substantial changes in their risk exposure generate alphas that are significantly higher than those with limited exposure variation. Other characteristics such as fund tracking errors, fund size, and investment style, or holdings-based measures cannot explain these findings.Analyzing the long-term persistence of active management, we provide evidence that the outperformance is due to managers' skill rather than to luck. Our findings contribute to the empirical evidence suggesting that active management may in some cases, produce short-term performance persistence.

Commodity momentum and reversal: Do they exist, and if so, why?

“…Under this restriction, the constant, $${\alpha }_{F-H}$$, represents the pricing error, namely the common return that cannot be explained by the risk factors in $${f}_{t}$$. According to asset pricing theory, if these risk factors perform well, the intercepts (pricing errors) $${\alpha }_{F-H}$$ for all momentum strategies should be (jointly) zero (see Bessler et al, 2022).…”

Robust market timing tests of Canadian hybrid mutual funds

“…However, their setting omits relevant risk factors in the benchmarks, which may alter their inferences (Matallín-Sáez, 2006). An alternative timing performance measure is proposed by Bessler et al . (2022) based on a portfolio performance persistence approach.…”

“…However, their setting omits relevant risk factors in the benchmarks, which may alter their inferences (Matall ın-S aez, 2006). An alternative timing performance measure is proposed by Bessler et al (2022) based on a portfolio performance persistence approach. They report positive timing ability of US equity fund managers based on the change in the exposure to systematic risk factors during two consecutive and nonoverlapping periods.…”

Commodities as an Asset Class

“…When all the risk factors are excess returns on traded assets, these timeseries regressions provide a time-series test about the performance of those risk factors in explaining the cross-section of momentum returns with the restriction that the risk premiums are equal to the averages of risk factors. Under this restriction, the constant, α J−K , represents pricing error, namely the common return that can not be explained by the risk factors in f t (see e.g., Bessler et al, 2022) and if these risk factors perform well, the intercepts (pricing errors) α J−K for all momentum strategies should be (jointly) zero, implied by asset pricing theory.…”