Inefficiencies in the Pricing of Exchange-Traded Funds. January published version working paper. Financial Analysts Journal , , 73 1 lead article. Note: The data have been fully refreshed, adding 4 more years to the earlier sample.
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Inefficiencies in the Pricing of Exchange-Traded Funds. January published version working paper. Financial Analysts Journal , , 73 1 lead article. Note: The data have been fully refreshed, adding 4 more years to the earlier sample. Related research report that focuses on market-on-close transactions in ETFs pdf file.
The prices of exchange-traded funds can deviate significantly from their net asset values, on average fluctuating within a band of about basis points, in spite of the arbitrage mechanism that allows authorized participants to create and redeem shares for the underlying portfolios.
The deviations are larger in funds holding international or illiquid securities where net asset values are most difficult to determine in real time. To control for stale pricing of the underlying assets, I introduce a novel approach using the cross-section of prices on a group of similar ETFs. Nevertheless, the average pricing band remains economically significant at about basis points, with even larger mispricings in some asset classes. Active trading strategies exploiting such inefficiencies produce substantial abnormal returns before transaction costs, providing further proof of short-term mean-reversion in ETF prices.
September joint with Jussi Keppo published version working paper. Journal of Alternative Investments , , 17 2 On the surface, hedge funds seem to have much higher fees than actively managed mutual funds. However, the true cost of active management should be measured relative to the size of the active positions taken by a fund manager. A mutual fund combines active positions with a passive position in the benchmark index, which can make the active positions expensive.
A hedge fund takes both long and short positions and uses leverage, which makes the active positions cheaper, but this can be offset by the expected incentive fees, especially for more volatile funds. We investigate the trade-offs from the perspective of a fund investor choosing between a mutual fund and a hedge fund, examining the impact of leverage, volatility, Active Share, nominal fees, and alpha for a realistic range of parameter estimates.
Our calibration shows that a moderately skilled active manager is approximately equally attractive to investors as a mutual fund manager or as a hedge fund manager, showing that both investment vehicles can coexist as efficient alternatives to investors. Further, our model explains documented empirical findings on career development of successful fund managers and on hedge funds' risk taking. Finally, we show that our findings are quite robust with respect to a jump risk in the hedge fund returns.
Keywords: Management fee, incentive fee, hedge fund, mutual fund. November joint with Max Kozlov. We find that a simple strategy that is long stocks with high earnings quality and short stocks with low earnings quality produces a higher Sharpe ratio than the overall market or similar strategies betting on value or small stocks.
This result holds both in the overall sample as well as in the more recent time period since Because the global earnings quality portfolio has a negative correlation with a value portfolio, an investor wishing to invest in both exposures can achieve significant diversification benefits.
Keywords: Earnings quality, value, international, accruals. Active Share and Mutual Fund Performance. July published version working paper. Financial Analysts Journal , , 69 4 Selected media coverage.
Click here for data on Active Share of mutual funds. I sort domestic all-equity mutual funds into different categories of active management using Active Share and tracking error.
I find that over my sample period until the end of , the most active stock pickers have outperformed their benchmark indices even after fees and transaction costs. In contrast, closet indexers or funds focusing on factor bets have lost to their benchmarks after fees. The same long-term performance patterns held up over the financial crisis, and they also hold within market cap styles. Closet indexing increases in volatile and bear markets and has become more popular after Cross-sectional dispersion in stock returns positively predicts average benchmark-adjusted performance by stock pickers.
Keywords: Active Share, tracking error, closet indexing. Should Benchmark Indices Have Alpha? Revisiting Performance Evaluation. July joint with Martijn Cremers and Eric Zitzewitz. Critical Finance Review , , lead article. NEW: Click here for return data on index-based factors. We find that these alphas primarily arise from the disproportionate weight the Fama-French factors place on small value stocks which have performed well, and from the CRSP value-weighted market index which is historically a downward-biased benchmark for U.
We explore alternative ways to construct these factors and propose alternative models constructed from common and easily tradable benchmark indices. The index-based models outperform the standard models in common applications such as performance evaluation of mutual fund managers.
Keywords: Benchmarking, factor models, portfolio management. September joint with Martijn Cremers published version working paper. Review of Financial Studies , , 22 9 lead article. To quantify active portfolio management, we introduce a new measure we label Active Share. It describes the share of portfolio holdings that differ from the benchmark index. We determine the type of active management for a portfolio by measuring it in two dimensions using both Active Share and tracking error volatility.
We apply this approach to the universe of all-equity mutual funds to characterize how much and what type of active management they practice. We test how active management is related to fund characteristics such as size, expenses, and turnover in the cross-section, and we examine the evolution of active management over time.
Active management also predicts fund performance: funds with the highest Active Share significantly outperform their benchmark indexes both before and after expenses, and they exhibit strong performance persistence even after controlling for momentum.
Non-index funds with the lowest Active Share underperform. Keywords: Portfolio management, Active Share, tracking error, closet indexing. October published version working paper. Journal of Financial and Quantitative Analysis , , 44 5 lead article. An earlier and more comprehensive version, including results on endogeneously arising institutions and optimal institutional structure pdf file.
Separate appendices: Empirical tests pdf file and a more elaborate model pdf file. Representative agent models are inconsistent with existing empirical evidence for steep demand curves for individual stocks. This paper resolves the puzzle by proposing that stock prices are instead set by two separate classes of investors. While the market portfolio is still priced by individual investors based on their collective risk aversion, those individual investors also delegate part of their wealth to active money managers who use that capital to price stocks in the cross-section.
In equilibrium the fee charged by active managers has to equal the before-fee alpha they earn; this endogenously determines the amount of active capital and the slopes of demand curves.
Keywords: Demand curves for stocks, delegated portfolio management, equilibrium mispricing, index premium. March published version working paper. Journal of Empirical Finance , , 18 2 This paper empirically investigates the index premium and its implications from to The premia have been growing over time, peaking in , and declining since then. Second, the implied price elasticity of demand increases with firm size and decreases with idiosyncratic risk, supporting theoretical predictions.
Third, we introduce a new concept that we label the index turnover cost, which represents a hidden cost borne by index funds and the indexes themselves due to the index premium. Journal of Financial Markets , revise and resubmit.
For index investors this creates a recurring cost: as the index is updated, they need to buy stocks with the premium and sell stocks without the premium. Different index rules can produce different index premia due to the different frequency and criteria of updating. We build a model to investigate the behavior of the index turnover cost and the portfolio performance of a mechanical index fund under a market-cap rule, an exogenous random rule, and a deterministic rule.
We find that the rational anticipation of future index composition reflected in prices today eliminates any first-order differences in index fund performance across the three index rules. As the index investors become a large part of the market, the non-index investors become less diversified, and this induces hedging motives which hurt the index investors especially under a market-cap rule. Many market participants expect Treasury bonds to collapse once the Fed ends its QE program because the Fed has been such a large buyer.
However, I find that this scenario is highly unlikely: the combination of rapidly declining Federal deficits and persistently large purchases by the foreign official sector mean that the private sector will not have to start buying new long-term Treasury bonds even after the Fed ends QE. Who Has Been Buying U.
When evaluating the impact of Treasury bond supply on long-term rates, most market observers seem to have overlooked two key issues: the large role of the foreign official sector it is not all about the Fed , and the distinction between all Treasuries vs. Korteila, Maria: " Volatiliteetti tekee salkunhoitajista vellihousuja ," Arvopaperi , December 1, in Finnish.
Active Share Measures Active Management
Skip to search form Skip to main content You are currently offline. Some features of the site may not work correctly. DOI: I sort domestic all-equity mutual funds into different categories of active management using Active Share and tracking error. I find that over my sample period until the end of , the most active stock pickers have outperformed their benchmark indices even after fees and transaction costs.
Active Share and Mutual Fund Performance
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