Not for “beating the market”!
Percentage of European funds outperformed by benchmarks
Percentage of US funds outperformed by benchmarks
Source: S&P SPIVA Year-End 2017
…for their marketing abilities!
Both the Ibert and al. paper which uses Swedish data and the Naim and Sokolinski paper which uses Israeli data find that market performance is weakly correlated with managers’ compensation. Instead, both papers argue, fund size seems to be more strongly related to managers’ pay. The conclusion is then that managers are compensated for their ability to attract investors’ funds and not for “beating the market”.
Are Mutual Fund Managers Paid For Investment Skill?
Authors: Markus Ibert, Ron Kaniel, Stijn Van Nieuwerburgh, Roine Vestman
From: SSE, University of Rochester, NYU, Stockholm University
What Does Compensation of Portfolio Managers Tell Us About Mutual Fund Industry?
Authors: Galit Ben Naim, Stanislav Sokolinski
From: Ministry of Finance, Israel, Harvard University
…but hedge fund managers improve market efficiency
The information environment is continuously evolving at both the market and firm levels, argue Chen and al. For instance the passages of Regulation Fair Disclosure and the Dodd-Frank Act have had wide-ranging influence on information communication, and led to substantial variation regarding how and what information is disseminated into the market. When the information environment changes, find Chen and al., sophisticated investors become more active in participating in stock markets and, on average, their trades can help restore price efficiency.
Sophisticated Investors and Market Efficiency: Evidence from a Natural Experiment
Authors: Yong Chen, Bryan Kelly, Wei Wu
From: Texas A&M University, Yale University
