Investment funds: What next?

Investment funds provide a low cost method of sharing in the rewards from capitalism. Recently “alternative investments” such as hedge funds have grown rapidly and the trading strategies open to hedge funds are now becoming available to mutual funds and even to ordinary retail investors. In this paper we analyze problems in assessing fund performance and the prospects for investment fund sectors. Choosing genuine outperformers among top funds requires a careful assessment of non-normality, order statistics and the possibility of false discoveries. The risk adjusted performance of the average hedge fund over the last 10-15 is actually not that impressive, although the “top” funds do appear to have statistically significant positive alphas

Mutual fund performance: measurement and evidence

The paper provides a critical review of empirical findings on the performance of mutual funds, mainly for the US and UK. Ex-post, there are around 0-5% of top performing UK and US equity mutual funds with truly positive-alpha performance (after fees) and around 20% of funds that have truly poor alpha performance, with about 75% of active funds which are effectively zero-alpha funds. Key drivers of relative performance are, load fees, expenses and turnover. There is little evidence of successful market timing. Evidence suggests past winner funds persist, when rebalancing is frequent (i.e., less than one year) and when using sophisticated sorting rules (e.g., Bayesian approaches) - but transactions costs (load and advisory fees) imply that economic gains to investors from winner funds may be marginal. The US evidence clearly supports the view that past loser funds remain losers. Broadly speaking results for bond mutual funds are similar to those for equity funds. Sensible advice for most investors would be to hold low cost index funds and avoid holding past ‘active’ loser funds. Only sophisticated investors should pursue an active ex-ante investment strategy of trying to pick winners - and then with much caution

False discoveries in UK mutual fund performance

We use a multiple hypothesis testing framework to estimate the false discovery rate (FDR) amongst UK equity mutual funds. Using all funds, we find a relatively high FDR for the best funds of 32.8% (at a 5% significance level), which implies that only around 3.7% of all funds truly outperform their benchmarks. For the worst funds the FDR is relatively small at 7.6% which results in 22% of funds which truly underperform their benchmarks. For different investment styles, this pattern of very few genuine winner funds is repeated for all companies, small companies and equity income funds. Forming portfolios of funds recursively for which the FDR is controlled at a ‘acceptable’ value, produces no performance persistence for positive alpha funds and weak evidence of persistence for negative alpha funds

UK mutual fund performance: Skill or luck?

Using a comprehensive data set on (surviving and non-surviving) UK equity mutual funds, we use a cross-section bootstrap methodology to distinguish between ‘skill’ and ‘luck’ for individual funds. This methodology allows for non-normality in the idiosyncratic risk of the funds — a major issue when considering those funds which appear to be either very good or very bad performers, since these are the funds which investors are primarily interested in identifying. Our study points to the existence of stock picking ability among a relatively small number of top performing UK equity mutual funds (i.e. performance which is not solely due to good luck). At the negative end of the performance scale, our analysis strongly rejects the hypothesis that most poor performing funds are merely unlucky. Most of these funds demonstrate ‘bad skill’. Recursive estimation and Kalman ‘smoothed’ coefficients indicate temporal stability in the ex-post performance alpha's of winner and loser portfolios. We also find performance persistence amongst loser but not amongst winner funds

No long-term effects of antenatal synthetic glucocorticoid exposure on epigenetic regulation of stress-related genes

Antenatal synthetic glucocorticoid (sGC) treatment is a potent modifier of the hypothalamic-pituitary-adrenal (HPA) axis. In this context, epigenetic modifications are discussed as potential regulators explaining how prenatal exposure to GCs might translate into persistent changes of HPA axis “functioning”. The purpose of this study was to investigate whether DNA methylation and gene expression profiles of stress-associated genes (NR3C1; FKBP5; SLC6A4) may mediate the persistent effects of sGC on cortisol stress reactivity that have been previously observed. In addition, hair cortisol concentrations (hairC) were investigated as a valid biomarker of long-term HPA axis activity. This cross-sectional study comprised 108 term-born children and adolescents, including individuals with antenatal GC treatment and controls. From whole blood, DNA methylation was analyzed by targeted deep bisulfite sequencing. Relative mRNA expression was determined by RT-qPCR experiments and qBase analysis. Acute stress reactivity was assessed by the Trier Social Stress Test (TSST) measuring salivary cortisol by ELISA and hairC concentrations were determined from hair samples by liquid chromatography coupled with tandem mass spectrometry. First, no differences in DNA methylation and mRNA expression levels of the stress-associated genes between individuals treated with antenatal sGC compared to controls were found. Second, DNA methylation and mRNA expression levels were neither associated with cortisol stress reactivity nor with hairC. These findings do not corroborate the belief that DNA methylation and mRNA expression profiles of stress-associated genes (NR3C1; FKBP5; SLC6A4) play a key mediating role of the persistent effects of sGC on HPA axis functioning

Winners and losers: German equity mutual funds

We investigate the performance of winners and losers for German equity mutual funds (1990–2009), using empirical order statistics. When using gross returns and the Fama–French three-factor model, the number of statistically significant positive alpha funds is zero but increases markedly when market timing variables are added. However, when using a ‘total performance’ measure (which incorporates both alpha and the contribution of market timing), the number of statistically significant winner funds falls to zero. The latter is consistent with the bias in estimated alphas in the presence of market timing. We also find that many poorly performing funds are unskilled rather than unlucky

Performance, Stock Selection and Market Timing of the German Equity Mutual Fund Industry

We investigate the performance of the German equity mutual fund industry over 20 years (monthly data 1990–2009) using the false discovery rate (FDR) to examine both model selection and performance measurement. When using the Fama–French three factor (3F) model (with no market timing) we find that at most 0.5% of funds have truly positive alpha-performance and about 27% have truly negative-alpha performance. However, the use of the FDR in model selection implies inclusion of market timing variables and this results in a large increase in truly positive alpha funds. However, when we use a measure of “total” performance, which includes the contribution of both security selection (alpha) and market timing, we obtain results similar to the 3F model. These results are largely invariant to different sample periods, alternative factor models and to the performance of funds investing in German and non-German firms — the latter casts doubt on the ‘home-bias’ hypothesis of superior performance in ‘local’ markets