基金文獻探討 - 政大學術集成

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(1)國立政治大學商學院金融學系 Department of Money and Banking College of Commerce National Chengchi University. 碩士論文 Master’s Thesis. 立. 政治大. ‧ 國. 學. 基金文獻探討. ‧. Literature Review of Fund Industry. n. er. io. sit. y. Nat. al. Ch. engchi. i Un. v. Student：何柏勳 HO,PO-HSUN Advisor：林靖庭博士 Dr. LIN,CHING-TING 林士貴博士 Dr. LIN,SHIH-KUEI. 中華民國 109 年 07 月 07.2020 DOI:10.6814/NCCU202001043.

(2) Acknowledgments 獻給我的母親. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i Un. v. DOI:10.6814/NCCU202001043.

(3) 摘要本論文統整基金相關文獻。指數型基金讓成份股共同漲跌，且增加了波動性。他們短期能增加低流動性股票的價格效率，但長期會使股票價格效率降低。避險基金像是共同基金的加強版，他們有更好的報酬，更少的政府規範，吸引頂尖的基金人才。大部分避險基金表現反週期行為，而大多共同基金因須保持流動性，表現動量行為。雖然平均而言基金沒有帶來超額報酬，但基金表現出不同的能力指標。我討論了有能力的基金的特徵，以及他們在景氣循環中不同的行為。資訊對基金產業是非常重要的，學習學術界資訊和反應時間短的. 政治大外洩的資訊。在基金經理人層面，有能力的經理人大多畢業於好的大學，擁有立能夠獲利。有不少文獻討論基金透過借貸資訊、公司內部人員、關說團體獲得. ‧ 國. 學. 理工背景並有個勇敢的個性。雖然他們沒有如零售投資人的注意力購買行為，但他們仍有有限的注意力。他們會被密集的營收報告、自己結婚、離婚、甚至. ‧. 當地天氣影響。機構投資人和零售投資人的行為偏誤，讓基金有機會利用，產. sit. y. Nat. 生代理人問題。零售投資人的行為偏誤可能來自於智商和基因，但經由財經教. io. er. 育，可以減少行為偏誤。對機構投資人，他們的借貸資訊和交易資訊可能被基. al. 金所利用。最後，討論現代的基金趨勢。量化基金雖然跟傳統基金沒有明顯的. n. iv n C hengchi U 報酬差異，但他們對於風險因子的曝險較少。單日文字情感分析對接下來兩日報酬有影響，而負面情緒的影響持續較正面的久。高頻交易的利潤與相對反應延遲有關係，所以這幾年速度競爭越來越激烈，造成高的進入障礙。. 關鍵字: 共同基金、避險基金、基金能力、代理人問題、基金經理人. i. DOI:10.6814/NCCU202001043.

(4) Abstract This article review literature about the fund industry. Exchange-Traded Funds (ETFs) make the constituent stocks comove more and introduce new volatility. They increase price efficiency for illiquid stocks in the short run, but lower price efficiency in the long run. Hedge funds are like “mutual fund on steroid”, they have better performance, less regulation, and attract talented managers. Most hedge funds act contrarian compare to the most of mutual funds fit momentum trading because of liquidity requirements. Than discuss on average lack of alpha of funds, the skill difference persists among the funds, the characteristic of skilled funds, and how. 政治大 skilled funds act differently in the booming and recession. Information is the key to 立. ‧ 國. 學. performance. Investors who fully utilize academy research and better reaction speed will bring a better return. There is possible information leakage. They may through. ‧. the linkage of loan information, corporate insiders, and lobbyists. At the manager. sit. y. Nat. level, the good funds’ managers may graduate from a good university, have a STEM. er. io. degree, and maybe a brave personality. But they do have limited attention that can be. al. distracted by multiple earning announcement, their marriage, and divorce, even. n. iv n C U and institutional investors h e nbiases influence by local weather. The behavioral g c hofi retail are different and can be exploited by funds, create agency problems. The behavioral bias for retail investors may root from IQ and genes but can be reduced by financial education. For institutional investors, the loan information and trading information can be exploited by funds. Last, the modern trend of funds. Though quant funds do not perform differently from traditional funds, they have a lesser exposure to risk factors. The daily sentiment has two days of momentum, negative sentiment persists longer than positive sentiment. The profit of the HFT industry links to relative latency, thus have a brutal latency war over the years and have a high entry barrier. Keywords: Mutual fund; Hedge fund; Skills of fund; Agency problem; Fund manager ii. DOI:10.6814/NCCU202001043.

(5) Table of Contents 摘要............................................................................................................................. i Abstract ......................................................................................................................ii List of Tables ............................................................................................................ iv List of Figures ............................................................................................................ v 1.. Introduction ......................................................................................................... 1. 2.. Know the passive index funds ............................................................................ 4. 3.. Know the actively managed funds ...................................................................... 7. 4.. Know the best ................................................................................................... 11. 5.. 政治大 Know your manager .......................................................................................... 17 立. Know your customers ....................................................................................... 20. 7.. Know the future ................................................................................................ 22. 8.. Conclusion ........................................................................................................ 24. ‧. ‧ 國. 學. 6.. n. al. er. io. sit. y. Nat. References ................................................................................................................ 27. Ch. engchi. iii. i Un. v. DOI:10.6814/NCCU202001043.

(6) List of Tables Table 1: Value and Percentage of U.S. Equities Holders .............................................. 2 Table 2: Largest 20 fund managers of 2018 .................................................................. 3 Table 3: Hedge funds – “mutual funds on steroid”........................................................ 7 Table 4: Behavior of hedge funds vs. mutual funds ...................................................... 9 Table 5: How skilled funds riding the waves? ............................................................. 13 Table 6: High-Frequency Trader ................................................................................. 22. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. iv. i Un. v. DOI:10.6814/NCCU202001043.

(7) List of Figures Figure 1: Investors do not earn positive alpha on average........................................... 11 Figure 2: Alpha is not ideal for skill measurement ...................................................... 11 Figure 3: Skill of funds exists and it is consistent, not just due to good lucks ............ 12 Figure 4: Speed is the name of the game ..................................................................... 15 Figure 5: What makes a good fund manager? ............................................................. 17 Figure 6: Not-so-professional about fund managers .................................................... 18 Figure 7: Institutional investors versus retail investors ............................................... 20 Figure 8: Behavioral bias of retail investors ................................................................ 20. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. v. i Un. v. DOI:10.6814/NCCU202001043.

(8) 1. Introduction U.S. equity market is huge and growing fast, and the most important part of it is mutual funds. See Table 1. Total U.S. equity holding in 2018 is US$42.9 trillion, it is more than doubled than 2009’s US$20.7 trillion. For all that equity, households only account for 36.1% in 2009, 37.6% in 2018, rest of all are held by the institutional investors. For all the equity hold by the institutional investors, the mutual funds hold the most, followed by foreign investors. They account for 24.4% of total U.S. equity in 2009, 22.6% in 2018. Though the percentage drop slightly, the total value is nearly double, from 2009’s US$5.1 trillion to 2018’s US$9.7 trillion. By all means mutual. 政治大 funds still the key player for the U.S. equity market. It is worth mentioning in the 立. ‧ 國. 學. recent decade, Exchange-Traded Funds (ETFs) are more than quadruple in the total value, grows from US$596 billion in 2009 to US$2.7 trillion in 2018. I am focusing. ‧. on empirical researches that can teach us how to be a better fund.. n. er. io. sit. y. Nat. al. Ch. engchi. 1. i Un. v. DOI:10.6814/NCCU202001043.

(9) Table 1: Value and Percentage of U.S. Equities Holders 2009 Type of Holder. US$ Billions. Total U.S. Holdings. 2018 Percent. US$ Billions. Percent. 20,666.91. 100.0%. 42,869.40. 100.0%. Households. 7,333.08. 36.1%. 16,127.74. 37.6%. Institutions. 13,333.83. 63.9%. 26,741.66. 62.4%. Mutual Funds. 5,093.64. 24.4%. 9,674.25. 22.6%. Foreign. 2,657.43. 13.4%. 6,335.06. 14.8%. 595.52. 3.1%. 2,669.34. 6.2%. State & Local Gov't Retirement Funds. 1,574.96. 7.2%. 2,291.60. 5.3%. Private Pension Funds. 1,504.45. 7.4%. 2,342.48. 5.5%. 194.59. 0.9%. 395.23. 0.9%. 224.50 治 0.9% 政 119.70 0.6% 大. 375.15. 0.9%. 303.28. 0.7%. Exchange-Traded Funds. Life Insurance Companies Property Casualty Companies Federal Gov't Retirement Funds. 0.5%. 147.69. 0.3%. 113.12. 0.5%. 253.69. 0.6%. U. S. Chartered Depository Institutions. 63.60. 0.3%. 110.68. 0.3%. Closed-End Funds. 87.43. 0.4%. 90.00. 0.2%. Federal Government. 67.35. 0.2%. 37.18. 0.1%. Monetary Authority. 25.11. 0.1%. 0.00. 0.0%. 25.11. 0.1%. 0.00. 0.0%. 863.20. 3.8%. 1,716.03. 4.0%. Nat. Other. Nonfinancial corporate business. ‧. ‧ 國. State & Local Governments. 學. 124.15. y. 立. sit. Broker/Dealers. io. n. al. er. Note: Households include non-profit organizations. Other contains foreign banking offices in the U.S. and funding corporations. Source: SIFMA (2019). Ch. engchi. i Un. v. The top 500 asset managers had US$91.5 trillion total assets under management in 2018 Willis Towers Watson (2019). That number even exceed global GDP that year: US$85.9 trillion World Bank (2019). Begin their rapid growth in the 1980s and 1990s, Institutional investors are essential for the modern world. Over half (51.7%) of assets are in the U.S., followed by 7.6% in the U.K., 7.31% in France. Most of the assets are equity (43.6%) and fixed income (34.4%). Table 2 list the largest 20 fund managers of 2018.. 2. DOI:10.6814/NCCU202001043.

(10) Table 2: Largest 20 fund managers of 2018 Rank. Manager. Country. Total assets (million). 1. BlackRock. U.S.. $5,975,818. 2. Vanguard Group. U.S.. $4,866,611. 3. State Street Global. U.S.. $2,511,297. 4. Fidelity Investments. U.S.. $2,424,697. 5. Allianz Group. Germany. $2,242,972. 6. J.P. Morgan Chase. U.S.. $1,987,000. 7. Bank of New York Mellon. U.S.. $1,722,000. 8. AMUNDI. France. $1,714,466. 9. Capital Group. U.S.. $1,677,381. 10. AXA Group. France. $1,628,579. 11. Goldman Sachs Group. 12. Prudential Financial. 13. Deutsche Bank. 14. Legal & General Group. 15. UBS. 16. BNP PARIBAS. 17. $1,542,000 $1,377,269 $1,301,633. U.K.. $1,288,660. 學. ‧ 國. 立. U.S. 治政 U.S. 大 Germany. Northern Trust Asset Mgmt.. U.S.. $1,069,400. 18. Wellington Mgmt.. U.S.. 19. Wells Fargo. U.S.. $964,700. 20. T. Rowe Price. U.S.. $962,300. ‧. $1,175,816. Nat. France. y. $1,222,839. sit. Switzerland. $1,003,389. io. n. al. er. Source: Willis Towers Watson, 2019. i Un. v. Our finance textbooks teach us from the rules-and-model aspect, just like. Ch. engchi. physics. For example, from discounted future cashflow we construct fundamental analysis, and from the CAPM model, we know diversified fund has lower risk. The rules-and-model thought makes sense in the book; however, it may not apply in the real world. For the most educated investor of all, mutual funds and hedge funds. The big questions are: Do they act by the books? What are the characteristics of the best funds? What is the real trend among the fund industry? This article will include six “knows” that discuss some interesting researches – know the passive index funds, know the actively managed funds, know the best, know your managers, know your customers, and know the future. 3. DOI:10.6814/NCCU202001043.

(11) 2. Know the passive index funds The most popular kind of passive index funds is Exchange-Traded Funds (ETFs). By Ben‐David, Franzoni, and Moussawi (2018), ETFs account for roughly 35% of the trading volume of the US stock market. It becomes extremely popular in the recent decade. Investment Company Institute (2019, p. 74) shows from 2009 to 2018, index funds and ETFs receive US$1.6 trillion inflow, while equity mutual funds have US$1.4 trillion outflows. Fichtner, Heemskerk, and Garcia-Bernardo (2017) find unlike disperse actively managed fund industry, the passive index fund industry is dominated by “the big tree”. 政治大 – BlackRock, Vanguard, and State Street – they control 80 to 90 percent of the index 立. ‧ 國. 學. fund market. They are the biggest shareholder for over 40% of all US-listed. companies and 88% of S&P 500 companies. They own a big portion of companies but. ‧. have little power on corporate governance because they cannot threaten to leave. They. sit. y. Nat. vote against managers less than 10% as other actively managed mutual funds.. er. io. However, they vote against managers about 45% to 50% in selecting the board of. al. directors. They use their power to select managers they prefer.. n. iv n C h eliquidity ETFs provide investors with high h ianUeasy way to diversify their n g cand. portfolio to follow the index, it is a good no-brainer choice for investors. French (2008) compares fees and transaction costs of the current market with a hypothetical all-passive invested market, which has a 10% turnover rate annually with passive fees. They calculate the whole society waste 0.67% growth annually on trying “beat the market” instead of invest passively. ETFs also become a popular choice for funds when they decide to park their money when they decide to act passively. Because most of the actively managed funds are compare with indexes as benchmarks. Basak and Pavlova (2013) provide a theoretical framework for this phenomenon.. 4. DOI:10.6814/NCCU202001043.

(12) There is two common arbitrage method relate to ETFs arbitrage. One is index composition arbitrage. Because the value of an ETF should equal the weighted value of their constituent assets. If the ETF price deviates from its fundamental value, one can buy/sell a mimic portfolio and hold until they return to the same level. Another arbitrage opportunity is index rebalancing. Passive fund managers are forced to buy or sell the stock when their fund rebalanced. The possibility of a stock moves in or out of index can be analyzed and predicted by a person or using HFT to rush in or out after index announcements. It is not all sunshine and rainbows for the world that everyone invests passively.. 政治大. There is a growing number of researches regarding the negative effect of this ETF. 立. frenzy in recent years. Ben‐David, Franzoni, and Moussawi (2018) find the demand. ‧ 國. 學. shock of ETF will propagate through index composition arbitrage, even the. ‧. fundamental of the firm does not change. So, high ETF ownership results in higher volatility for the stocks. They also have up to 6.7% annually risk premiums. The. y. Nat. io. sit. constituent stocks under the same ETF also tend to move together. Broman (2016). n. al. er. find because ETFs provide an easy way to invest in different styles and industry (such. Ch. i Un. v. as small-blend funds and technology funds). The comovement of underlying stocks is. engchi. mainly due to investor changing their investing styles and industry. Israeli, Lee, and Sridharan (2017) find ETFs decrease price efficiency. They show that on average, the firms that ETFs holding increasing by 1%, lead to 1.6% wider bid-ask-spread next year, 2% increase in absolute returns next year, 9% increase for movement synchronicity annually, and a 14% lower future earnings response coefficient. They explain ETF drive up costs by crowding out shares available for regular traders, plus make uninformed traders more likely to invest in ETFs instead of providing liquidity to the stock. However, Glosten, Nallareddy, and Zou (2020) find ETFs can increase short-term efficiency for small firms with low 5. DOI:10.6814/NCCU202001043.

(13) analyst coverage and low liquidity. They provide an easy way to incorporate systematic information into their price. ETF investors can act irrationally. Levy and Lieberman (2013) find when the market ETFs in the other countries still open, they do follow the underlining net asset value. But when are closed, they follow the S&P 500 index disproportionally. More and more ETFs blur the line between the passive and active funds, by applying “smart-beta” or quantitative strategy. Crane and Crotty (2018) show passive index funds also have skill differences. The source of the skill between those ETFs can be an interesting topic for future discussion.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 6. i Un. v. DOI:10.6814/NCCU202001043.

(14) 3. Know the actively managed funds Table 3: Hedge funds – “mutual funds on steroid”. 立. 政治大. ‧. ‧ 國. 學. The two main branches of actively managed funds are mutual funds and hedge. y. Nat. io. sit. funds. A hedge fund is like “mutual fund on steroid”. Using performance around the. n. al. er. merge-arbitrage event, Cao et al. (2016) find hedge funds outperform 3.7% annually. Ch. i Un. v. than other institutional investors. Unlike mutual funds on average provide no alpha,. engchi. Ibbotson, Chen, and Zhu (2011) decompose hedge funds returns into alpha 3.0%, beta 4.7%, and fees 3.4%. While control of survivor and backfill biases, they find hedge funds have positive alpha even during the 2009 crisis. Though private equity and hedge funds are relatively small for the global equity market, both account for less than three percent as Fichtner (2019) mentions. Their customers are high-net-worth individuals and institutional investors, not for average Joe. Thus, the regulatory agencies do not need to protect the public that may be scammed by the fund companies. Compare to the mutual funds, they have practically no regulations and can use all the tricks to maximizing their profit. Including every 7. DOI:10.6814/NCCU202001043.

(15) financial instrument, shorting position, high-leverage, and involvement in corporate management. There is one type of mutual finds called “hedge fund for the retail investor” - the long/short funds, the mutual funds can take a short position like hedge funds. McCarthy and Wong (2020) find they still underperform by different hedge fund indexes 1.7% to 3.5% annually. The managers of hedge funds are also heavily rewarded by their compensation structure. Hedge funds and private equity often on “two and twenty” base. That is low (about 1.5% percent) fees and a high portion (twenty percent) of portfolio value that exceeds a set target, i.e. “high water mark”. Kaplan and Rauh (2010) estimate their. 政治大. fees are between 3.2% to 4.4% AUM, significantly higher than mutual funds.. 立. Consistent with Ibbotson, Chen, and Zhu (2011) 3.4% estimation.. ‧ 國. 學. By comparison, both actively managed mutual funds and index mutual funds,. ‧. their fees are calculated by a percentage of assets under management (AUM), and they are dropping for the last decade. By Investment Company Institute (2019), for. y. Nat. io. sit. actively managed equity mutual funds, expense ratio drops from 0.99% for 2009, to. n. al. er. 0.74% for 2019. And for passive index equity mutual funds, expense ratio drops from. Ch. i Un. v. 0.17% for 2009, to 0.07% for 2019. By Silver (2017), active funds often aim to beat. engchi. the relevant index i.e. “the market”. For example, S&P500 for the U.S., Taiwan Capitalization Weighted Stock Index (TAIEX) for Taiwan. The fund managers also compete with their peers, their performances are evaluated each quarter. The jargon “we aim to be in the second quartile” means they want to be better than half of all fund managers, but not the very top because it might indicate they take too many risks. The current performance will bring up the future incentive for managers, as an indirect incentive. Hedge funds win again. Lim, Sensoy, and Weisbach (2016) calculate that hedge funds’ indirect incentives are 1.4 to 6.0 times of direct incentive 8. DOI:10.6814/NCCU202001043.

(16) by different estimation. For mutual funds, the indirect incentive is only 28% to 66% of those hedge funds estimated. Those huge incentives for hedge funds, no wonder Kostovetsky (2017) show there are brain-drain for mutual funds. That most skillful fund managers change their career to the hedge funds. Kacperczyk, Nieuwerburgh, and Veldkamp (2014) also support that top mutual fund managers are more likely to transfer to hedge funds later. By including hedge funds in my research, we can know how the most sophisticated managers in the industry performed given the freedom to operate. Del Guercio, Genç, and Tran (2018) even find those mutual managers who also co-manage hedge funds, their performance is lower 1.2% annually than those. 政治大. only manage mutual funds. That suggests agency problems that they prefer their. 立. hedge funds to mutual funds.. ‧ 國. 學. Table 4: Behavior of hedge funds vs. mutual funds. ‧. n. er. io. sit. y. Nat. al. Ch. engchi. i Un. v. The investing behavior of hedge funds and mutual funds also different. Echoing previous research, Grinblatt et al. (2020) find two-third of hedge funds managers are contrarian, and they have the extraordinary stock-picking skill to buy undervalued stocks, not just simply provide liquidity. They earn 2.4% alpha annually and their skill is persistence. Also, about two-third of mutual funds managers have the momentum trading style. After adjusting for momentum, they earn no alpha. They suggest the 9. DOI:10.6814/NCCU202001043.

(17) behavior is due to they have to fire-sale when market crash because of daily liquidity regulation, plus they want to capture retail customers’ attention by invest in highperformance stocks. Manconi, Massa, and Yasuda (2012) they show mutual funds’ actions when the financial crisis hits in 2017, securitize bond suddenly become “toxic” and illiquid. They find mutual funds were fire-sale corporate bonds, not the securitize bond. They also tend to sell more junk bonds then invest-grade ones. That explains the risk propagation from securitized bonds to corporate bonds due to liquidity demand. Aragon, Martin, and Shi (2019) study two 21st century financial crises, the tech bubble (1999–2001) and the financial crisis (2007–2009). They study. 政治大. lock-up versus non-lockup hedge funds. They find by condition on borrowing costs,. 立. the lock-up premium is 5.9% annually. The high-borrowing costs environment can put. ‧ 國. 學. extra pressure on liquidity provision.. ‧. Due to the loose regulation for hedge funds, to study them should take extra attention for their freedom and incentive in filling data, such as backfilling bias. The. y. Nat. io. sit. survival bias should be aware of as well. The market cycle and crisis can hugely affect. n. al. er. everyone’s behavior, the market environment should not be treated as uniform and. Ch. i Un. v. time-less. However, the exact timing of the market cycle is somewhat arbitrary and be decided ex-post mostly.. engchi. 10. DOI:10.6814/NCCU202001043.

(18) 4. Know the best Figure 1: Investors do not earn positive alpha on average. The fund industry on average seems doesn’t generate significant positive alpha.. 政治大 Lewellen (2011) find institutional investors only generate insignificant 0.32% CAPM 立. ‧ 國. 學. alpha annually. Dichev and Yu (2011) find for the hedge funds, the dollar-weighted. return of the investors is even worse than the buy-and-hold return of the hedge funds. ‧. by 3% to 7% annually. And also, no alpha generated, they just barely win over the. sit. y. Nat. risk-free rate. Dyck, Lins, and Pomorski (2013) find for actively managed funds in the. al. er. io. U.S., they underperform 0.28% annually after fees.. n. Figure 2: Alpha is not ideal for skill measurement. Ch. engchi. i Un. v. Lack of alpha does not mean funds do not have skills on average. Berk and van Binsbergen (2015) challenge the fairness for using the alpha as a measurement. The 11. DOI:10.6814/NCCU202001043.

(19) net alpha (alpha minus fees) may be the result of the competition of investors for skilled fund, so they are close to zero. Because big funds are generally harder to generate the same gross alpha as smaller funds. The return base measure as gross alpha (alpha before fees) may overlook the size effect of funds. They propose using fund value-added as a measure of funds skill. They find mutual funds do on average, add US$3.2 million annually. Kacperczyk, Nieuwerburgh, and Veldkamp (2014) also find the skill of mutual funds diminishing when a fund grows in size and age. Top 25% funds are average $400 million smaller and five years younger. In comparison, top managers are only slightly younger, one year on average, and 1.7 years of lesser. 政治大. experience. Roussanov, Ruan, and Wei (2018) also find 0.78% annually alpha. 立. decrease when funds have one standard deviation increase in log size. However,. ‧ 國. 學. Ibbotson, Chen, and Zhu (2011) find bigger hedge funds take more risks and gain. funds.. ‧. more rewards, thus there are no differences in performance compared with smaller. y. Nat. io. sit. Puckett and Yan (2011) mention a possible flaw in studying skills of funds. Most. n. al. er. literature is based on quarterly data because of its availability. That may overlook the. Ch. i Un. v. round-trip trades between quarters. They acquired complete transaction data for. engchi. institutional investors, finds 0.27% to 0.34% return annually. When they mimicking the quarterly data with the same data set, their performances go negative. Figure 3: Skill of funds exists and it is consistent, not just due to good lucks. 12. DOI:10.6814/NCCU202001043.

(20) As in any industry, some funds perform well while some are not. It is not fair to average out and make a conclusion all the funds do not have skills. Researches prove that skill of funds exists and it is consistent, not just due to good lucks. Kacperczyk, Nieuwerburgh, and Veldkamp (2014) construct a skill index, find after half-year, those on the top 20% outperform the bottom 20% by 3.0% to 6.3% annually, 0.6% to 2.1% annually after one year, based on different alpha calculation. Berk and van Binsbergen (2015) even find the skill can persistent about ten years. Sun, Wang, and Zheng (2018) show real skill is doing relatively well in recessions, not those doing well in booming. The top 20% hedge funds in recession outperform 7% than the. 政治大. bottom 20% in the next year, and their skill can persist for about three years. The top. 立. hedge funds in the booming market do not show persistent skill.. ‧ 國. 學. Table 5: How skilled funds riding the waves?. ‧. n. er. io. sit. y. Nat. al. Ch. engchi. i Un. v. There is no one-size-fits-all solution for a market boom and recession. The best funds should be adjusted with the market cycles accordingly. How are skilled funds riding the waves? Kacperczyk, Nieuwerburgh, and Veldkamp (2014) find skilled mutual funds have better stock-picking skill when market boom, and better stocktiming skill when in market recession. Previous job experience may contribute to the managers’ stock-picking skill or stock-timing skill. Chen et al. (2018) find those 13. DOI:10.6814/NCCU202001043.

(21) mutual fund managers whose previous job is an industry analyst, they have better stock-picking skill. And those previous job is a microanalyst have better stock-timing skill. In different market sentiment environments also suit for different tactics. Smith et al. (2016) focus on hedge funds. They suggest because when sentiment is high, stocks have a higher chance to be overvalued. Thus, the technical analysis users have better performance than others by 5.3% in return, four-factor alpha 1.4%, and sevenfactor alpha 1.3% annually. When the sentiment low, stocks have a higher chance to be undervalued. Thus, non-technical users like fundamental analysis can better capture those undervalue stocks. Non-technical users outperform by 2.4% in return,. 政治大. four-factor alpha 2.3%, and seven-factor alpha 0.6% (not significant) annually.. 立. Knowledge is power. Newly found factors by academy may also widely use by. ‧ 國. 學. investors. Mclean and Pontiff (2016) look into 97 predictors from 79 studies that able. ‧. to predict cross-sectional stock returns. By comparing to out-of-sample results to rule out statistical bias, they estimate a 32% decline in post-publication returns are. y. Nat. io. sit. contributed to investors learn from the academy. Though this study does not specify. n. al. er. the investors’ type. However, Edelen, Ince, and Kadlec (2016) By divided into two. Ch. i Un. v. periods, 1982-1996 and 1997-2011, they find the seven well-known anomalies do not. engchi. disappear over time when those anomalies are much well known.. 14. DOI:10.6814/NCCU202001043.

(22) Figure 4: Speed is the name of the game. 立. 政治大. ‧. ‧ 國. 學. Nat. sit. y. Speed is the name of the game. Chordia, Roll, and Subrahmanyam (2005) find. n. al. er. io. information measure by order imbalance, reacts in the range of 5 to 60 minutes. A. i Un. v. specific case studied by Hu, Pan, and Wang (2017), they find high-frequency traders. Ch. engchi. (HFTs) discover the price within 200 milliseconds. Many even jump the gun, suggest possible information leakage. Hendershott, Livdan, and Schürhoff (2015) find evidence that the direction of institution trading can predict earnings surprises and unscheduled company crisis announcements. They begin to trading the stock ten days before the announcement. For macroeconomic news, they seem to lose prediction power except for the economic indicators. That suggests information leakage between companies and institutional investors. Kurov et al. (2019) find even macroeconomic news cannot immune to information leakage. They find 9 out of 20 macroeconomic have evidence for significant preannouncement movement. The price starts to move about 30 minutes before the announcement, that movement account for 30% to 67% 15. DOI:10.6814/NCCU202001043.

(23) total reacted price for the stock market, 16% to 55% for the bond market. Gao and Huang (2016) show that hedge funds may be using their connection with lobbyists to gain private political information. They see 6.7% to 11.1% annually difference by connected hedge funds investing in politically influenced stocks. Also, they find the performance drop significantly after Stop Trading on Congressional Knowledge (STOCK) Act, show the importance of regulations. The golden standard to measure the performance is alpha. However, there are so many different kinds of alpha that often lead to widely different results. The reputable articles often list results from multiple kinds of alpha, including insignificant ones.. 政治大. That diversity of alpha makes direct cross-comparison between the result of articles. 立. questionable. Many pieces of the research base on a select time frame or relatively. ‧ 國. 學. short period, that result may change in the different financial environment. A well-. ‧. conduct Mata-research to replicate the resulting from different articles and datasets has tremendous value. Such as Mclean and Pontiff (2016) reproduce the results of 97. y. Nat. n. al. er. io. sit. predictors from 79 studies.. Ch. engchi. 16. i Un. v. DOI:10.6814/NCCU202001043.

(24) 5. Know your manager Figure 5: What makes a good fund manager?. 立. 政治大. What are characteristic for the skilled managers? The ones graduate from a good. ‧ 國. 學. university, but not necessarily from Ivy League. Having a STEM degree is better. Managers’ gender and age are not important. Also, maybe have a brave personality.. ‧. Kang et al. (2020) study hedge fund managers, suggest who have STEM. Nat. sit. y. (science, technology, engineering, and mathematics) degree will make them a better. n. al. er. io. manager in a long run. At the begging, a STEM major has worse performance than a. i Un. v. business major. They have about -1.5% quarterly risk-adjusted return, while the. Ch. engchi. business major has near zero. By about 22 quarters later, their performance meets with the business major. By 50 quarters later, their quarterly adjusted return is around 1%, surpass those business major, -0.2%. For those who have STEM and business double degrees, they have the best of both worlds – starting about the same with the business major, rising to about 4% after 50 quarters. Plus, graduate from a better university proxy by SAT score give you an edge. However, Kacperczyk, Nieuwerburgh, and Veldkamp (2014) compose a skill index, compare the top 25% of mutual fund managers with the rest, show no difference if they graduate from the Ivy League. Also, gender is not important at all, and the top 25% of managers’ average age is only. 17. DOI:10.6814/NCCU202001043.

(25) one year younger, compared to the top 25% funds are average five years younger than the rest of funds, age is not too important as well. For those managers are more risk tolerance, i.e. “brave”. Bodnaruk and Simonov (2016) using a questionnaire to evaluate managers’ personalities. They find brave managers show less disposition effect, earn about 2% more adjusted-return annually, and less likely to be fired. However, Andreu and Puetz (2017) using CFA and MBA double degree vs. who only have one as a personality measure. They do make less extreme investments and thus have fewer extreme higher returns, but they do not have performance differences between them.. 政治大. Figure 6: Not-so-professional about fund managers. 立. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i Un. v. Those professional fund managers do have a lot of resources and tools to help them. According to Barber and Odean (2008), though unlike individual investors, especially for value-strategy institutional investors, they do not show the attentiondriven buying behavior like individual investors. Which only notices the stocks have huge trading volume and high return in one day. But they are not omniscient, they still have limited attention resources. While distracted, their performance suffers. Chen et al. (2020) link institutional investors’ IP addresses on the SEC website. They find those managers follow few company insiders closely and they are more likely to trade 18. DOI:10.6814/NCCU202001043.

(26) accordingly after SEC insider trading reports. The tracked stocks have 12% more alphas than other stocks. Schmidt (2019) find those active fund managers are distracted during the earning announcements for stocks in their portfolio, thus less likely to trade other stocks. They find more they distracted, they have higher disposition effects, suffer from higher costs, and performance suffered. Even personal life can be a distraction for managers. Lu, Ray, and Teo (2016) find the performance of hedge funds drop half-year before and after the manager’s marriage and divorce event. Alpha drop 8.5% annually for marriage, drop 7.4% around divorce. Goetzmann et al. (2015) show that even the weather can influence institutional investors’. 政治大. behavior. The cloudier weather induces pessimistic views on stocks and more likely to. 立. sell assets.. ‧ 國. 學. A lot of articles that successful land on reputable journals have either hard-to-. ‧. obtain data or requires a multidisciplinary approach. Examples such as proprietary full-transaction data obtain form the consulting firm by Puckett and Yan (2011);. y. Nat. io. sit. manager’s marital data obtained from the court record and internet search by Lu, Ray,. n. al. er. and Teo (2016); combine weather data with fund managers’ data by Goetzmann et al.. Ch. i Un. v. (2015); IQ data form Finnish military by Grinblatt et al. (2015); gene research from. engchi. twin database by Cronqvist and Siegel (2014); and HFT transaction data by Hu, Pan, and Wang (2017).. 19. DOI:10.6814/NCCU202001043.

(27) 6. Know your customers Figure 7: Institutional investors versus retail investors. 政治大. There are two different types of funds for targeting different customers, retail-. 立. oriented funds and institutional-oriented funds. Retail funds are sold to everyone, have. ‧ 國. 學. significantly lower initial investment requirement than institutional-oriented funds.. ‧. While retail investors are more concerned about non-rational signals like past absolute returns, and often overlook the fees. The institutional investors, especially for big. y. Nat. io. sit. institutional funds have more sensitivity about the risk-adjust return, Jensen’s alpha,. n. al. er. and performance relative to benchmarks. Those findings supported by Evans and. Ch. i Un. v. Fahlenbrach (2012), James and Karceski (2006), Salganik-Shoshan (2015), and a lab experiment by Anufriev et al. (2019).. engchi. Figure 8: Behavioral bias of retail investors. Misalignment of funds’ benefits and customers’ benefits that cause agency problems. Know your customers too well, may find possible exploitations for them. For retail-oriented funds, Guercio and Reuter (2014) compare to direct-sold funds, they suggest the customers of broker-sold funds are more likely influenced by brokers, and less aware of more objective valuation of funds as after fee adjusted 20. DOI:10.6814/NCCU202001043.

(28) performance. Broker-sold funds underperform direct-sold funds by 1.2% annually. Even more pronounced in small-capitalization growth funds that need more active management, underperform 2.1% annually. Those behavioral biases by retail investors may link to IQ and genes. But they can be reduced by having financial knowledge. Grinblatt et al. (2015) find high-IQ investors avoid high-fee funds and channels. Top 4% IQ pay about 10% fewer fees than the bottom 4%. Having a business education correlate 4% lower in fees. However, IQ-performance is hard to conclude because the performance is too noisy. Cronqvist and Siegel (2014) control generic variables by identical twins, they find different type of behavioral bias can be. 政治大. explained 25% to 45% by the gene. Having financial knowledge proxy by their job. 立. can eliminate genetic effects almost entirely.. ‧ 國. 學. Even firms may be exploited by institutional investors. Ivashina and Sun (2011). ‧. find information for syndicated loans (loans provided by a collective of institutional investors such as hedge funds, mutual funds, insurance companies…etc.) may be used. y. Nat. io. sit. in trading. They find 5.1% more annually abnormal returns for these stocks. However,. n. al. er. Griffin, Shu, and Topaloglu (2012) using high-frequency data from a brokerage that. Ch. i Un. v. may have more advantage than previous research, they find no such information. engchi. leakage. Big investors may also exploit by other big investors through brokers. Maggio et al. (2019) show that information about big informed trades is spread by the more connected broker to other institutional investors, they have nearly double return by those trades. The behavioral bias for retail investors is a hot topic in the academy. Barber and Odean (2013, chap. 22) have a very comprehensive review of literature about this topic. Investment is a very important part of everyone’s life regardless of their career. Therefore, everyone needs to learn the correct financial knowledge to avoid those biases, or many sellers will prey on those biases. 21. DOI:10.6814/NCCU202001043.

(29) 7. Know the future I will discuss the researches about the modernization of funds - computerized funds like quant funds, news sentiment, and High-Frequency Trader (HFT). Is quant better? Harvey et al. (2017) using text analysis to distinguish different types of hedge funds. The systematic hedge fund, funds mainly decided by algorithms with little to none human interference; the discretionary hedge fund, funds which mainly decided by humans. The discretionary equity funds have 1.2% higher average return than systematic funds, but the alpha for the systematic fund is 1.1%, not significantly different than the discretionary fund, 1.2%. And discretionary funds have. 政治大 more risk factor exposure than the systematic fund, 2.9% versus 1.8%. 立. ‧ 國. 學. How about news sentiment analysis? Heston and Sinha (2017) using Thomson. Reuters sentiment data. For the daily sentiment, a portfolio by long the top 10%. ‧. stocks and short bottom 10% stock generate significant 1.99% daily return at day. sit. y. Nat. zero, 0.17% for day two, and 0.04% after day three. For the weekly sentiment, they. er. io. find the effect of positive sentiment died faster, about two to three weeks. But the. al. effect of negative sentiment prolongs about a quarter. Although not significant, the. n. iv n C U Contrary to “no news is h e n positive neutral news has a 0.01% to 0.06% weekly g c h ieffect. good news”, it is more likely “any publicity is good publicity”. Table 6: High-Frequency Trader. About High-Frequency Trader (HFT), they are incredibly fast. HFTs reaction time often considers at the microsecond level. They using sophisticated algorisms and internet infrastructures to compete with not only the information itself but also from other HFT peers. Hu, Pan, and Wang (2017) find a specific case for E-mini S&P 500 22. DOI:10.6814/NCCU202001043.

(30) futures, 75% of trading volume is within 200 milliseconds and the price has fully adjusted to the new balance. Baron et al. (2019) use Sweden data, shows the latency competitions among HFT firms can explain their performance difference. The top five fastest HFTs have brutal competition in latency over years. In 2010, they have 1,280 microseconds latency. In 2014, they have about 10 microseconds. The rest of the HFTs remain about 25,000 microseconds in the same period, they still earn an average of about 11 thousand SEK per day. The top five fastest HFTs have about 16% more price impact than the rest of the HFT firms, and they earn about 26 thousand SEK every day. Because of the latency competition, the HFT industry has a high entry barrier for new players.. 立. 政治大. The population of easy-to-use coding languages such as Python makes more. ‧ 國. 學. business students learning data analysis and quant technique. The line between quant. ‧. and traditional funds will be blur and more will lean to the quant side. In March 2020, the stock trading system in Taiwan changes from call auction every 5 seconds to. y. Nat. io. sit. continuous trading. That opens the door for HFT development in the Taiwan stock. n. al. er. market. The recent technologies development such as Heston and Sinha (2017) use. Ch. sentimental analysis by natural language. engchi. 23. i Un. v. DOI:10.6814/NCCU202001043.

(31) 8. Conclusion The mutual funds are the most important part of the U.S. equity market. The institutional investors hold about two-third of total U.S. equity, and the largest portion of them is mutual funds. They grow almost double in value in recent decay, to the enormous amount, about US$ 27.7 trillion. I review some interesting research that may help the fund industry to be a better fund. “Know the passive index funds”. The ETFs thrive in the recent decade. Most of them concentrate on “the big three”. They have tremendous power over corporate governance but rarely use it because of their passive nature. If the whole market. 政治大 turning passive, it will gain 0.67% more annually by reducing searching costs. They 立. ‧ 國. their assets.. 學. also become a popular choice when the actively managed funds that decide to park. ‧. However, ETFs led to high comovement for their constituent stocks by providing. sit. y. Nat. an easy way to invest in style or industry. They also introduce a new source of. er. io. volatility by index arbitrage. They decrease the price efficiency because they crowd. al. out uninformed investors and stock outstanding in the long run, but increase. n. iv n C efficiency in the short run especiallyhfor eilliquid h i UAdditionally, market indexes n g cstocks. in other countries move with the S&P 500 when they close. “Know the actively managed funds”. I discuss hedge fund is like “mutual fund on steroid”. They target high-net-worth and institutional customers, very low regulation, and heavy rewards for managers. No wonder they attract most skillful managers and perform better than mutual funds. The mutual funds have liquidity regulation, make most of them behave momentum trading strategy. They sometimes have to fire sale in the crisis, like selling corporate bonds when securitize bonds become “toxic”. On the other hand, hedge funds are contrarian, using the chance to pick undervalued stocks and profit from it. 24. DOI:10.6814/NCCU202001043.

(32) Lock-up hedge funds have even less pressure to provide liquidity thus have a higher premium. “Know the best”. On average, funds on average seem does not generate positive alpha. Some challenge traditional alpha is not a good measurement, we should use value-added instead. Also, the commonly used quarterly data is overlooking roundtrip investment and lead to underestimating their performance, high-frequency data will be better. Using average to represent the whole fund industry is not fair. Multiple pieces of research find they are skill discrepancy between funds can lead to up to 7% performance difference annually. The skill of funds is consistent up to ten years, and. 政治大. we can only distinguish skills especially in the recession.. 立. Different market cycles are suitable for different skills. In the boom, skilled. ‧ 國. 學. mutual funds show better stock-picking skill and hedge funds using technical analysis. ‧. perform well. In the recession, skilled mutual funds show better stock-timing skill and hedge funds fundamental analysis perform well.. y. Nat. io. sit. The speed and knowledge is power. Investors will learn from the academy to. n. al. er. utilize newly found risk factors. And reaction speed for the regular investors is five to. Ch. i Un. v. sixty minutes, to HFTs less than 200 milliseconds. Some research even finds evidence for information leakage.. engchi. “Know your managers”. The characteristic of good managers may graduate from a good university, but not essentially in the Ivy League. Graduate from STEM will outperform their business degree peers in the long run. And being young seems not important than work in a young fund. And maybe is good to have a brave personality. The managers are not omniscient, they have limited attention. They track a few insiders and have higher performance than untracked ones. But during busy announcement season or even during their own marriage or divorce, they are distracted and therefore performance suffered. 25. DOI:10.6814/NCCU202001043.

(33) “Know your customers” retail investors may just aware non-rational signals like past absolute returns, and often overlook the fees. Institutional investors, on the other hand, care more about the risk-adjust return, Jensen’s alpha, and performance relative to benchmarks. Retail investors their non-rational behavior may be exploited by funds. Those behavioral biases may have rooted in our genes and IQ. But they can be reduced by financial knowledge and education. Broker-sold funds are expensive and perform worse than direct-sold funds shows possible agency problems. Even firms or funds may be exploited by other institutional investors. Their lending or huge trade. 政治大. information may leak and used by other investors.. 立. “Know the future.” I discuss the modernization of funds. Regarding quant. ‧ 國. 學. funds, there is no significant difference in performance, but they have less exposure to. ‧. risk factors than traditional funds. For sentiment analysis, they find daily sentiment has about two days of momentum. Good news influence about two weeks, but bad. y. Nat. io. sit. news can persist a quarter. For HFT, their profit link to relative latency, and the. n. al. er. competition is more brutal each year.. Ch. i Un. v. “Truth is stranger than fiction, but it is because fiction is obliged to stick to. engchi. possibilities; Truth isn't.” - Mark Twain. The truth in the financial world is much weirder than the fundamental theories from textbooks. The complex and everchanging nature of human society makes these new researches very important to read. The new technology will be interesting topics for funds, such as neutral language processing, big data mining, artificial intelligence, and blockchain. The evolution of the financial world during the COVID‑19 pandemic is also very interesting. We will expect to see exciting paradigm-changing development for the fund industry in the near future.. 26. DOI:10.6814/NCCU202001043.

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