Sharpening the Arithmetic of Active Management

Pedersen, Lasse Heje

doi:10.2469/faj.v74.n1.4

Cited by 52 publications

(18 citation statements)

References 19 publications

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“…Passive portfolios need to deal with securities that are issued or repurchased, reinvest stock dividends and bond coupons, and other events that entail portfolio rebalancing. Since this trading can be costly for passive investors (Pedersen, 2018), we also use investable funds (mutual funds and ETFs) that incur these costs. Table 3 presents the statistics for their monthly returns in local currency during our sample period.…”

Section: Methodsmentioning

confidence: 99%

Investment performance, regulation and incentives: the case of Chilean pension funds

López

Walker

2020

Journal of Pension Economics and Finance

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We examine the investment performance of Chilean pension funds during their multi-fund period (2003–17). Using tradable asset class benchmarks, we extend Sharpe's (1992) return-based style analysis by explicitly considering regulatory restrictions and currency hedging. We find that despite the significant differences between pension fund manager returns, they are statistically similar to our style benchmarks for all fund types. Furthermore, accounting for currency hedging improves the accuracy of the replicating portfolios and the selection return estimates. Our results have policy implications for investment regulation of pension systems with similar characteristics to the Chilean one.

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Section: Methodsmentioning

confidence: 99%

Investment performance, regulation and incentives: the case of Chilean pension funds

López

Walker

2020

Journal of Pension Economics and Finance

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“…He acknowledges, however, that even a passive investor must trade twice, once to get into the position and once to get out, and these trades can provide an opportunity for active investors to gain from passive investors by providing liquidity (Sharpe (1991, footnote 4)). Second, Pedersen (2018) further points out that the “market” itself changes over time because new companies and shares are added, old shares are repurchased, and companies sometimes delist. Hence, passive investors also need to trade to track the market.…”

Section: Performancementioning

confidence: 99%

“…Institutions are sophisticated investors. If active investing is even approximately a negative sum game (Sharpe (1991), Pedersen (2018)), why did institutions delegate these assets to active managers? In this study, we analyze the performance of these delegated assets and find that the answer to this question is straightforward: Institutions earned positive alphas on the assets that they delegated to active strategies and they would not have done better managing passive strategies in‐house.…”

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confidence: 99%

Asset Managers: Institutional Performance and Factor Exposures

Gerakos¹,

Linnainmaa²,

Morse³

2021

The Journal of Finance

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Using data on $18 trillion of assets under management, we show that actively managed institutional accounts outperformed strategy benchmarks by 75 (31) bps on a gross (net) basis during the period 2000 to 2012. Estimates from a Sharpe model imply that asset managers' outperformance came from factor exposures. If institutions had instead implemented mean‐variance efficient portfolios using index and institutional mutual funds available during the sample period, they would not have earned higher Sharpe ratios. Our results are consistent with the average asset manager having skill, managers competing for institutional capital, and institutions engaging in costly search to identify skilled managers.

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“… See Sharpe (1991;Bogle (2005) andFrench (2008) among others. In addition,Pedersen (2018) provides evidence that the theoretical argument about active management being a zero-sum game does not hold in the real world.7 The reduced profitable opportunities are mainly due to increasing market efficiency(Bernstein, 1998;Chordia et al, 2008Chordia et al, , 2011Conrad et al, 2015) and increasing competition among fund managers(Dyck et al, 2013;Pástor et al, 2015;Hoberg et al, 2017).…”

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confidence: 99%

On the Performance of Cryptocurrency Funds

Bianchi

Babiak

2020

SSRN Journal

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We investigate the performance of funds that specialise in cryptocurrency markets. In doing so, we contribute to a growing literature that aims to understand the role of digital assets as an investment. Methodologically, we implement a novel bootstrap approach that samples jointly the cross-sectional distribution of alphas and controls for the nonnormality of fund returns and their within-strategy correlations. Empirically, we find that a sizable minority of managers are able to cover their costs and generate large alphas. However, there is weak statistical evidence of managers' skills once withinstrategy common variation in returns is taken into account.

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Sharpening the Arithmetic of Active Management

Cited by 52 publications

References 19 publications

Investment performance, regulation and incentives: the case of Chilean pension funds

Investment performance, regulation and incentives: the case of Chilean pension funds

Asset Managers: Institutional Performance and Factor Exposures

On the Performance of Cryptocurrency Funds

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