We use a new database to perform a comprehensive analysis of the mutual fund industry. We find that funds hold stocks that outperform the market by 1.3 percent per year, but their net returns underperform by one percent. Of the 2.3 percent difference between these results, 0.7 percent is due to the underperformance of nonstock holdings, whereas 1.6 percent is due to expenses and transactions costs. Thus, funds pick stocks well enough to cover their costs. Also, high-turnover funds beat the Vanguard Index 500 fund on a net return basis. Our evidence supports the value of active mutual fund management. DO MUTUAL FUND MANAGERS WHO actively trade stocks add value? Academics have debated this issue since the seminal paper of Jensen ~1968!. Although some controversy still exists, the majority of studies now conclude that actively managed funds ~e.g., the Fidelity Magellan fund!, on average, underperform their passively managed counterparts ~e.g., the Vanguard Index 500 fund!. 1 For example, Gruber ~1996! finds that the average mutual fund underperforms

Abstract: We develop a model of stock prices in which there are both differences of opinion among investors as well as short-sales constraints. The key insight that emerges is that breadth of ownership is a valuation indicator. When breadth is low i.e., when few investors have long positions in the stock this signals that the short-sales constraint is binding tightly, implying that prices are high relative to fundamentals and that expected returns are therefore low. Thus reductions in breadth should forecast lower returns, while increases in breadth should forecast higher returns. Using quarterly data on mutual fund holdings over the period 1979-1998, we find evidence supportive of this prediction: stocks whose change in breadth in the prior quarter places them in the lowest decile of the sample underperform those in the top change-in-breadth decile by 6.38 % in the first twelve months after portfolio formation. After adjusting for size, book-tomarket and momentum, the corresponding figure is 4.95%.

This paper documents that hedge funds did not exert a correcting force on stock prices during the technology bubble. Instead, they were heavily invested in technology stocks. This does not seem to be the result of unawareness of the bubble: Hedge funds captured the upturn, but, by reducing their positions in stocks that were about to decline, avoided much of the downturn. Our findings question the efficient markets notion that rational speculators always stabilize prices. They are consistent with models in which rational investors may prefer to ride bubbles because of predictable investor sentiment and limits to arbitrage.

The paper has also benefited from the comments of the participants at the Chicago Quantitative Alliance spring meeting, Federal Reserve Bank of New York finance workshop, Harvard University Department of Economics finance seminar, MIT Sloan School of Management finance brown-bag lunch and finance seminar, NBER Behavioral Finance working group meeting, and Stanford Business School finance seminar. Errors and omissions remain our responsibility. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research.

and SGF 2006 for their helpful comments. The first and second authors acknowledge

Abstract not found

Individual investor trading results in systematic and economically large losses. Using a complete trading history of all investors in Taiwan, we document that the aggregate portfolio of individuals suffers an annual performance penalty of 3.8 percentage points. Individual investor losses are equivalent to 2.2 % of Taiwan’s gross domestic product or 2.8% of the total personal income. Virtually all individual trading losses can be traced to their aggressive orders. In contrast, institutions enjoy an annual performance boost of 1.5 percentage points, and both the aggressive and passive trades of institutions are profitable. Foreign institutions garner nearly half of institutional profits. (JEL G11, G14, G15, H31) Financial advisers recommend that individual investors refrain from frequent trading. Investors should buy and hold diversified portfolios, such as low-cost mutual funds. If skill contributes to investment returns, individual investors are obviously at a disadvantage when trading against professionals. What is less clear is just how much do individual investors lose by trading? In this paper, we document that trading in financial markets leads to economically large losses for individual investors and virtually all of the losses of individual investors

This article uses transactions data for all NYSE/AMEX stocks in the period 1983–2002 to study how investors trade in Jegadeesh and Titman’s (1993) momentum portfolios. Among small trades, there is an extremely sluggish reaction to the past returns. For instance, an initial small-trade buying pressure exists for loser stocks, and it gradually converts into an intense selling pressure over the following year. The results are consistent with initial underreaction followed by delayed reaction among small traders. Moreover, small-trade imbalances during the formation period significantly affect momentum returns, suggesting that underreaction among small traders contributes to the momentum effect. Large traders, by contrast, show no evidence of underreaction, and largetrade imbalances have little impact on subsequent returns. Overall, the results suggest that momentum could partly be driven by the behavior of small traders.

This paper shows that the existence of managerial ability, combined with the labor contract prevalent in the industry, implies that the closed-end fund discount should exhibit many of the primary features documented in the literature. We evaluate the model’s ability to match the quantitative features of the data, and find that it does well, although there is some observed behavior that remains to be explained. THE ROLE OF DELEGATED PORTFOLIO MANAGERS in financial markets has puzzled financial economists for some time. Their high level of remuneration suggests that they add considerable value. Yet, while their important role as providers of diversification services is widely recognized, economists have had difficulty finding evidence of any additional value that might justify their compensation levels. It is certainly not hard to find examples of funds that seem to add no value. For example, the Homestead Nasdaq 100 Index Tracking Stock Fund (ticker: HNASX) is an open-end fund that charges investors 1.5 % per year to track the Nasdaq 100 index. As of September 30, 2004, 99.42 % of the fund was invested in a single security, the NASDAQ 100 exchange-traded fund (QQQQ). The remaining 0.58 % was in cash. Investors in the fund therefore pay 1.5 % per annum to invest in a single security they could buy themselves for no annual charge. 1 This lack of evidence of ability raises serious questions about why investors entrust their savings to active managers at all, and nowhere is this puzzle starker than in the closed-end fund sector. Here, most funds trade at a discount

Abstract: Fund managers subject to a short term performance review have an adverse incentive to evade VaR controls by engaging in zero net investment portfolio overlay strategies. As Goetzmann et al. (2002) show, these strategies have the unfortunate attribute that they can expose the fund investor to significant downside risk. Weisman (2002) uses the term “informationless investing ” to describe this behavior, and argues that these strategies are “peculiar to the asset management industry in general, and the hedge fund industry in particular ” and that these strategies “can produce the appearance of return enhancement without necessarily providing any value to an investor. ” We devise a simple procedure to determine whether a given pattern of trading is consistent with informationless investing and apply it to a unique database of daily transactions and holdings of a set of forty successful Australian equity managers. Contrary to Weisman’s conjecture, this behavior does not appear to be widespread. While a minority of managers appear to engage in a pattern of trading consistent with informationless investing, this phenomenon is limited to positions taken in individual securities, and seems to be more closely related to both behavioral patterns of trading and seasonal window dressing, rather than as a specific response to adverse incentives of money