Active Share and Mutual Fund Performance. Antti Petajisto Antti Petajisto is a researcher and portfolio manager at quantPORT, a systematic multi-strategy. A mutual fund combines active positions with a passive position in the benchmark index, which can make the Active Share and Mutual Fund Performance. The data file shows the Active Share of U.S. equity mutual funds, computed over the original factors in performance evaluation applications (see the paper for .
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Active management also predicts fund performance: We find that actively managed funds are more active and charge lower fees when they face more competitive pressure from low-cost explicitly indexed funds. Demand curves for stocks, delegated portfolio management, equilibrium mispricing, index premium. We argue that persistent closet indexing implicates a number of legal issues, including possible liability for fund advisors under the Securities Act and the Investment Company Act.
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. The time period is We explore alternative ways to construct these factors and propose alternative models constructed from common and easily tradable benchmark indices. Active trading strategies exploiting such inefficiencies produce substantial abnormal returns before transaction costs, providing further proof of short-term mean-reversion in ETF prices.
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. Since closet index funds charge considerably higher fees than true index funds but provide a substantially similar portfolio, they tend to be poor investment choices.
We introduce a new measure of active portfolio management, Active Share, which represents the share of portfolio holdings that differ from the benchmark index holdings.
Inefficiencies in the pricing of exchange-traded funds A Petajisto. However, I find that this scenario is highly unlikely: Active and passive portfolio management mutual funds hedge funds ETFs behavioral finance. A purportedly active fund with a portfolio that ad overlaps with the market is known as a closet index fund. New articles by this author. Click here for a detailed description of the data.
July joint with Martijn Fknd and Eric Zitzewitz. You should think of the above data files as mostly an extension of the data used by Cremers and Petajistoadding another six years and containing a few methodological tweaks. Funds trading frequently generally underperform, including those with high Active Share. My profile My library Metrics Alerts.
A mutual fund combines active positions with a passive position in the benchmark index, which can make the active positions expensive. Fama and French introduced stock market factors to control for the size effect and the value effect. Our fune shows that a moderately skilled active manager is approximately equally attractive to investors as a mutual fund perrformance or as a hedge fund manager, showing that both investment vehicles can coexist as efficient alternatives to investors.
This paper empirically investigates the index premium and its implications from to Here are the rules for using the data:.
Antti Petajisto – Google Scholar Citations
However, the true cost of active management should be measured relative to the size of the active positions taken by a fund manager. The premia have been growing over time, peaking inand declining since then.
The index premium and its hidden cost for perfromance funds A Petajisto Journal of Empirical Finance 18 2, Critical Finance Review, 2: Active Share predicts fund performance: Representative agent models are inconsistent with existing mutjal evidence for steep demand curves for individual stocks.
The data have been fully refreshed, adding 4 more years to the earlier sample. I sort domestic all-equity mutual funds into different categories of active management using Active Share and tracking error. Closet Indexing,” November 15, pdf file.
Should benchmark indices have alpha? We relate Active Share to fund characteristics such as size, expenses, and turnover in the cross-section, and we also examine its evolution over time. Non-index funds with the lowest Active Share underperform their benchmarks. Our results suggest that U. We apply this approach to the universe of all-equity mutual funds to characterize how much and what type of active management they practice.
Review of Financial Studies, 22 9: A quasi-natural experiment using the exogenous variation in indexed funds generated by the passage of pension laws supports a causal interpretation of the results.
Journal of Financial and Psrformance Analysis, 44 5: Closet indexing increases in volatile and bear markets and has become more popular after The data file shows the Active Share of U. Journal of Empirical Finance, 18 2: Active Share, tracking error, closet indexing.
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 antyi financial crisis, and they also hold within market cap styles.
Petajisto / Research
When evaluating the impact of Treasury bond supply on long-term rates, most market observers seem to have overlooked two key issues: If you agree to ufnd above, you may proceed to download the following files:. Employing proprietary IPD data for U.
An earlier and more comprehensive version, including results on endogeneously arising institutions and optimal institutional structure pdf file.
Many market participants expect Treasury bonds to collapse once the Fed ends its QE program because the Fed has been such a large buyer.