Double or nothing: Patterns of equity fund holdings and transactions
Double or nothing: Patterns of equity fund holdings and transactions
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Transcript of Double or nothing: Patterns of equity fund holdings and transactions
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Double or nothing: Patterns of equity fund holdings and
transactions
Stephen J. Brown NYU Stern School of Business
David R. Gallagher University of NSW
Onno Steenbeek Erasmus University / ABP Investments
Peter L. Swan University of NSW
www.stern.nyu.edu/~sbrown
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Performance measurement
Leeson Investmen
tManagem
ent
Market (S&P 500)
Benchmar
k
Short-term
Government
Benchmark
Average Return
.0065 .0050 .0036
Std. Deviation
.0106 .0359 .0015
Beta .0640 1.0 .0
Alpha .0025(1.92)
.0 .0
Sharpe Ratio
.2484 .0318 .0
Style: Index Arbitrage, 100% in cash at close of trading
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Frequency distribution of monthly returns
0
5
10
15
20
25
30
35
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Percentage in cash (monthly)
0%
20%
40%
60%
80%
100%
120%
31-Dec-1989 15-May-1991 26-Sep-1992 8-Feb-1994
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Examples of riskless index arbitrage …
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Percentage in cash (daily)
-600%
-500%
-400%
-300%
-200%
-100%
0%
100%
200%
31-Dec-1989 15-May-1991 26-Sep-1992 8-Feb-1994
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Apologia of Nick Leeson
“I felt no elation at this success. I was determined to win back the losses. And as the spring wore on, I traded harder and harder, risking more and more. I was well down, but increasingly sure that my doubling up and doubling up would pay off ... I redoubled my exposure. The risk was that the market could crumble down, but on this occasion it carried on upwards ... As the market soared in July [1993] my position translated from a £6 million loss back into glorious profit.
I was so happy that night I didn’t think I’d ever go through that kind of tension again. I’d pulled back a large position simply by holding my nerve ... but first thing on Monday morning I found that I had to use the 88888 account again ... it became an addiction”
Nick Leeson Rogue Trader pp.63-64
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Sharpe ratio of doublers
-0.2
-0.1
0
0.1
0.2
0.3
0.4
All Doublers
Doublers who have notyet embezzled
Sharpe Ratio ofMarket
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Informationless investing
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Informationless investing
Zero net investment overlay strategy (Weisman 2002)
Uses only public informationDesigned to yield Sharpe ratio greater than
benchmark
Why should we care?
Sharpe ratio obviously inappropriate here
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Informationless investing
Zero net investment overlay strategy (Weisman 2002)
Uses only public informationDesigned to yield Sharpe ratio greater than benchmark
Why should we care?
Sharpe ratio obviously inappropriate hereBut is metric of choice of hedge funds and derivatives
traders
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We should care!
Agency issuesFund flow, compensation based on
historical performanceGruber (1996), Sirri and Tufano
(1998), Del Guercio and Tkac (2002)
Behavioral issuesStrategy leads to certain ruin in the
long term
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Examples of Informationless investing
Doubling a.k.a. “Convergence trading”
Covered call writing
Unhedged short volatilityWriting out of the money calls
and puts
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Forensic Finance
Implications of Informationless investing
Patterns of returns
Patterns of security holdings
Patterns of trading
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Sharpe Ratio of Benchmark
-200%
-150%
-100%
-50%
0%
50%
100%
-50% 0% 50% 100%
Benchmark
Sharpe ratio = .631
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Maximum Sharpe Ratio
-200%
-150%
-100%
-50%
0%
50%
100%
-50% 0% 50% 100%
Benchmark
MaximumSharpe RatioStrategy
Sharpe ratio = .748
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Short Volatility Strategy
-200%
-150%
-100%
-50%
0%
50%
100%
-50% 0% 50% 100%
Benchmark
Shortvolatility
Sharpe ratio = .743
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Doubling
-200%
-150%
-100%
-50%
0%
50%
100%
-50% 0% 50% 100%
Benchmark
Doubling(upper 5%)
Doubling(median)
Doubling(lower 5%)
Sharpe ratio = .046
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Doubling (no embezzlement)
-200%
-150%
-100%
-50%
0%
50%
100%
-50% 0% 50% 100%
Benchmark
Doubling(upper 5%)
Doubling(median)
Doubling(lower 5%)
Sharpe ratio = 1.962
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Concave trading strategies
-200%
-150%
-100%
-50%
0%
50%
100%
-50% 0% 50% 100%
Benchmark
Doubling(median)
MaximumSharpe RatioStrategy
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Hedge funds follow concave strategies
R-rf = α + β (RS&P- rf) + γ (RS&P- rf)2
Concave strategies: tβ > 1.96 & tγ < -1.96
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Hedge funds follow concave strategies
ConcaveNeutra
lConve
x N
Convertible Arbitrage
Dedicated Short Bias
Emerging Markets
Equity Market Neutral
Event Driven
Fixed Income Arbitrage
Fund of Funds
Global Macro
Long/Short Equity Hedge
Managed Futures
Other
5.38%0.00%21.89%1.18%27.03%2.38%16.38%4.60%11.19%2.80%5.00%
94.62%100.00
%77.25%97.06%72.64%95.24%82.06%91.38%86.62%94.17%91.67%
0.00%0.00%0.86%1.76%0.34%2.38%1.57%4.02%2.18%3.03%3.33%
13027233170296126574174
109942960
Grand Total 11.54% 86.53% 1.93% 3318
R-rf = α + β (RS&P- rf) + γ (RS&P- rf)2
Source: TASS/Tremont
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Portfolio Analytics Database
36 Australian institutional equity funds managers
Data on Portfolio holdings Daily returns Aggregate returns Fund size
59 funds (no more than 4 per manager) 51 active 3 enhanced index funds 4 passive 1 international
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Some successful Australian funds
Fund
Sharpe
Ratio AlphaFF
AlphaBet
aSkewne
ssKurtos
is
Annual turnov
er
1 0.1017 0.08% 0.10% 0.90 -0.5209 4.6878 20.69
(2.21) (2.58)
2 0.1500 0.16% 0.17% 1.11 0.0834 4.2777 0.79
(6.44) (5.88)
3 0.1559 0.19% 0.20% 1.08 0.7382 7.6540 1.18
(4.09) (4.36)
16 0.1079 0.09% 0.09% 0.96 -0.2558 4.1749 0.34
(2.66) (2.61)
27 0.0977 0.12% 0.11% 1.03 -0.2667 3.4316 1.27
(2.42) (2.25)
36 0.1814 0.29% 0.31% 0.90 -0.6248 5.1278 0.62
(3.02) (3.06)
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Style and return patterns
Category Beta
Treynor Mazuy
measure
Modified Henriksson
Merton measure
Number of observatio
ns
GARP
0.96347
-0.01105(-2.30)
-0.08989(-2.52)
2395
Growth
1.03670
-0.00708(-1.53)
-0.03762(-1.15)
1899
Neutral
1.02830
-0.00110(-0.29)
-0.02092(-0.71)
1313
Other
1.00670
-0.00196(-0.53)
0.00676(0.21)
640
Value
0.76691
-0.01215(-1.93)
-0.10350(-2.24)
2250
Passive/Enhanced
1.01440
0.00692(1.51)
0.04593(1.47)
859
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Size and return patterns
Category Beta
Treynor Mazuy
measure
Modified Henriksson Merton measure
Number of observation
s
Largest 10 Institution
al Manager
No
0.9627
-0.00645(-2.25)
-0.05037(-2.34)
6100
Yes
0.8819
-0.01306(-2.60)
-0.10095(-2.92)
2397
Boutique firm
No
0.9322
-0.01029(-3.12)
-0.07616(-3.23)
5709
Yes
0.9556
-0.00452(-1.25)
-0.04184(-1.49)
2788
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Incentives and return patterns
Category Beta
Treynor Mazuy
measure
Modified Henriksson
Merton measure
Number of
observations
Annual Bonus
No
0.9819
0.00013(0.03)
0.01233(0.35)
308
Yes
0.9386
-0.00857(-3.32)
-0.06720(-3.56)
8189
Domestic owned
No
0.9739
-0.00990(-2.80)
-0.07282(-2.79)
4262
Yes
0.9053
-0.00652(-1.86)
-0.05557(-2.18)
4235
Equity Ownershi
p by senior staff
No
0.9322
-0.01029(-3.12)
-0.07616(-3.23)
5709
Yes
0.9556
-0.00452(-1.25)
-0.04184(-1.49)
2788
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Patterns of derivative holdings
Fund Investm
ent Style
Calls Puts Month end option positions
Fund
Number Strike Number Strike
Concavity decreasing
Concavity increasing Total
GARP 123456
1113
0.726-0.0610.0990.041-0.6500.2220.8110.054
1.0171.0501.0171.0231.0621.0760.0021.076
0.395-0.1220.0210.008-1.346
0.950
0.9570.9040.9520.9440.985
0.674
100%29%59%77%
100%100%100%
71%41%23%
100%
8024679
89818118
11
Growth 15161718
-0.033-0.039-0.367-0.059
1.0561.0601.0671.023
0.1070.108
0.9510.913
27%
35%13%
73%100%65%87%
118
83344
Neutral 212224
-0.0930.5670.405
1.0380.9840.854
-0.093 0.947 10%100%100%
90%
208101
Other 25 0.079 1.147 0.147 0.965 94% 6% 35
Value 33 0.050 0.914 57% 43% 23
Passive/ Enhanced
3839
-0.013-0.026
0.9481.036
-0.017-0.041
0.9550.959
9%10%
91%90%
340613
Total 38% 62% 3027
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Patterns of derivative holdings
Fund Investm
ent Style
Calls Puts Month end option positions
Fund
Number Strike Number Strike
Concavity decreasing
Concavity increasing Total
GARP 123456
1113
0.726-0.0610.0990.041-0.6500.2220.8110.054
1.0171.0501.0171.0231.0621.0760.0021.076
0.395-0.1220.0210.008-1.346
0.950
0.9570.9040.9520.9440.985
0.674
100%29%59%77%
100%100%100%
71%41%23%
100%
8024679
89818118
11
Growth 15161718
-0.033-0.039-0.367-0.059
1.0561.0601.0671.023
0.1070.108
0.9510.913
27%
35%13%
73%100%65%87%
118
83344
Neutral 212224
-0.0930.5670.405
1.0380.9840.854
-0.093 0.947 10%100%100%
90%
208101
Other 25 0.079 1.147 0.147 0.965 94% 6% 35
Value 33 0.050 0.914 57% 43% 23
Passive/ Enhanced
3839
-0.013-0.026
0.9481.036
-0.017-0.041
0.9550.959
9%10%
91%90%
340613
Total 38% 62% 3027
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Patterns of derivative holdings
Fund Investm
ent Style
Calls Puts Month end option positions
Fund
Number Strike Number Strike
Concavity decreasing
Concavity increasing Total
GARP 123456
1113
0.726-0.0610.0990.041-0.6500.2220.8110.054
1.0171.0501.0171.0231.0621.0760.0021.076
0.395-0.1220.0210.008-1.346
0.950
0.9570.9040.9520.9440.985
0.674
100%29%59%77%
100%100%100%
71%41%23%
100%
8024679
89818118
11
Growth 15161718
-0.033-0.039-0.367-0.059
1.0561.0601.0671.023
0.1070.108
0.9510.913
27%
35%13%
73%100%65%87%
118
83344
Neutral 212224
-0.0930.5670.405
1.0380.9840.854
-0.093 0.947 10%100%100%
90%
208101
Other 25 0.079 1.147 0.147 0.965 94% 6% 35
Value 33 0.050 0.914 57% 43% 23
Passive/ Enhanced
3839
-0.013-0.026
0.9481.036
-0.017-0.041
0.9550.959
9%10%
91%90%
340613
Total 38% 62% 3027
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Doubling trades
h0 = S0 – C0
h0 : Initial highwater mark
S0 : Initial stock position
C0 : Cost basis of initial position
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Doubling trades
h0 = S0 – C0
S1 = d S0
C1 = (1+rf ) C0
Bad news!
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Doubling trades
h0 = S0 – C0
S1 = d S0 + 1
C1 = (1+rf ) C0 + 1
Increase the equity position to cover the loss!
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Doubling trades
h0 = S0 – C0 h1 = u S1 – (1+rf) C1
S1 = d S0 + 1
C1 = (1+rf ) C0 + 1
Good news!
1 is set to make up for past losses and re-establish security position
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Doubling trades
h0 = S0 – C0 h1 = u S1 – (1+rf) C1
S1 = d S0 + 1
C1 = (1+rf ) C0 + 1
Good news!
1 is set to make up for past losses and re-establish security position
1 = + S0 h0 - u d S0 + (1+rf)2 C0
u – (1+rf)
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Doubling trades
h0 = S0 – C0
S1 = d S0 + 1
C1 = (1+rf ) C0 + 1
S2 = d S1
C2 = (1+rf ) C1
Bad news again!
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Doubling trades
h0 = S0 – C0 h2 = u S2 – (1+rf) C2
S1 = d S0 + 1
C1 = (1+rf ) C0 + 1
S2 = d S1 + 2
C2 = (1+rf ) C1 + 2
Good news finally!
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Doubling trades
h0 = S0 – C0 h2 = u S2 – (1+rf) C2
S1 = d S0 + 1
C1 = (1+rf ) C0 + 1
S2 = d S1 + 2
C2 = (1+rf ) C1 + 2
Good news finally!
2 is set to make up for past losses and re-establish security position
2 = + S0 h1 - u d S1+ (1+rf)2 C1
u – (1+rf)
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Doubling trades
h0 = S0 – C0
S1 = d S0 + 1
C1 = (1+rf ) C0 + 1
S2 = d S1 + 2
C2 = (1+rf ) C1 + 2
S3 = d S2
C3 = (1+rf ) C2
Bad news again!
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Doubling trades
h0 = S0 – C0
S1 = d S0 + 1
C1 = (1+rf ) C0 + 1
S2 = d S1 + 2
C2 = (1+rf ) C1 + 2
S3 = d S2
C3 = (1+rf ) C2
Bad news again!
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Doubling trades
h0 = S0 – C0
S1 = d S0 + 1
C1 = (1+rf ) C0 + 1
S2 = d S1 + 2
C2 = (1+rf ) C1 + 2
S3 = d S
2C
3 = (1+rf ) C
2
Bad news again!
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Doubling trades
h0 = S0 – C0
S1 = d S0 + 1
C1 = (1+rf ) C0 + 1
S2 = d S1 + 2
C2 = (1+rf ) C1 + 2S
3 = d S2
C3 = (1+r
f ) C2
Bad news again!
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Doubling trades
h0 = S0 – C0
S1 = d S0 + 1
C1 = (1+rf ) C0 + 1
S2 = d S1 + 2
C2 = (1+rf ) C1 + 2S3 =
d S
2
C3 =
(1+r
f ) C2
Bad news again!
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Doubling trades
h0 = S0 – C0
S1 = d S0 + 1
C1 = (1+rf ) C0 + 1
S2 = d S1 + 2
C2 = (1+rf ) C1 + 2
S3 =
d S
2
C3 =
(1+r
f ) C2
Bad news again!
![Page 45: Double or nothing: Patterns of equity fund holdings and transactions](https://reader035.fdocuments.us/reader035/viewer/2022070404/56813b62550346895da45e19/html5/thumbnails/45.jpg)
Doubling trades
h0 = S0 – C0
S1 = d S0 + 1
C1 = (1+rf ) C0 + 1
S2 = d S1 + 2
C2 = (1+rf ) C1 + 2
S3 =
d S
2
C3 =
(1+r
f ) C2
Bad news again!
![Page 46: Double or nothing: Patterns of equity fund holdings and transactions](https://reader035.fdocuments.us/reader035/viewer/2022070404/56813b62550346895da45e19/html5/thumbnails/46.jpg)
Doubling trades
h0 = S0 – C0
S1 = d S0 + 1
C1 = (1+rf ) C0 + 1
S2 = d S1 + 2
C2 = (1+rf ) C1 + 2
S3 =
d S
2
C3 =
(1+r
f ) C2
Bad news again!
![Page 47: Double or nothing: Patterns of equity fund holdings and transactions](https://reader035.fdocuments.us/reader035/viewer/2022070404/56813b62550346895da45e19/html5/thumbnails/47.jpg)
Doubling trades
h0 = S0 – C0
S1 = d S0 + 1
C1 = (1+rf ) C0 + 1
S2 = d S1 + 2
C2 = (1+rf ) C1 + 2
Bad news again!
![Page 48: Double or nothing: Patterns of equity fund holdings and transactions](https://reader035.fdocuments.us/reader035/viewer/2022070404/56813b62550346895da45e19/html5/thumbnails/48.jpg)
Observable implication of doubling
i = a + b1 (1 - i) hi-1 + b2 Vi + b3 Bi + b4 i + b5 Gi
On a loss, trader will increase position size by
otherwise, position is liquidated on a gain,
for all trades
i = + S0 hi-1 - u d Si-1+ (1+rf)2 Ci-1
u – (1+rf)
![Page 49: Double or nothing: Patterns of equity fund holdings and transactions](https://reader035.fdocuments.us/reader035/viewer/2022070404/56813b62550346895da45e19/html5/thumbnails/49.jpg)
Observable implication of doubling
i = + S0 hi-1 - u d Si-1+ (1+rf)2 Ci-1
u – (1+rf)
i = a + b1 (1 - i) hi-1 + b2 Vi + b3 Bi + b4 i + b5 Gi
Vi = (1 - i) d Si-1 , the value of security on a loss
otherwise, position is liquidated on a gain,
On a loss, trader will increase position size by
![Page 50: Double or nothing: Patterns of equity fund holdings and transactions](https://reader035.fdocuments.us/reader035/viewer/2022070404/56813b62550346895da45e19/html5/thumbnails/50.jpg)
Observable implication of doubling
i = + S0 hi-1 - u d Si-1+ (1+rf)2 Ci-1
u – (1+rf)
i = a + b1 (1 - i) hi-1 + b2 Vi + b3 Bi + b4 i + b5 Gi
Bi = (1 - i) (1 + rf ) Ci-1 , the cost basis of the security
otherwise, position is liquidated on a gain,
On a loss, trader will increase position size by
![Page 51: Double or nothing: Patterns of equity fund holdings and transactions](https://reader035.fdocuments.us/reader035/viewer/2022070404/56813b62550346895da45e19/html5/thumbnails/51.jpg)
Observable implication of doubling
i = + S0 hi-1 - u d Si-1+ (1+rf)2 Ci-1
u – (1+rf)
i = a + b1 (1 - i) hi-1 + b2 Vi + b3 Bi + b4 i + b5 Gi
Gi = I (Si – Ci – hi) , the measure of gain once highwatermark is reached
otherwise, position is liquidated on a gain,
On a loss, trader will increase position size by
![Page 52: Double or nothing: Patterns of equity fund holdings and transactions](https://reader035.fdocuments.us/reader035/viewer/2022070404/56813b62550346895da45e19/html5/thumbnails/52.jpg)
Observable implication of doubling
i = + S0 hi-1 - u d Si-1+ (1+rf)2 Ci-1
u – (1+rf)
i = a + b1 (1 - i) hi-1 + b2 Vi + b3 Bi + b4 i + b5 Gi
< 0< 0 > 0> 0> 0 ?
On a loss, trader will increase position size by
otherwise, position is liquidated on a gain,
![Page 53: Double or nothing: Patterns of equity fund holdings and transactions](https://reader035.fdocuments.us/reader035/viewer/2022070404/56813b62550346895da45e19/html5/thumbnails/53.jpg)
Some successful Australian funds
Fund
Sharpe
Ratio AlphaFF
AlphaBet
aSkewne
ssKurtos
is
Annual turnov
er
1 0.1017 0.08% 0.10% 0.90 -0.5209 4.6878 20.69
(2.21) (2.58)
2 0.1500 0.16% 0.17% 1.11 0.0834 4.2777 0.79
(6.44) (5.88)
3 0.1559 0.19% 0.20% 1.08 0.7382 7.6540 1.18
(4.09) (4.36)
16 0.1079 0.09% 0.09% 0.96 -0.2558 4.1749 0.34
(2.66) (2.61)
27 0.0977 0.12% 0.11% 1.03 -0.2667 3.4316 1.27
(2.42) (2.25)
36 0.1814 0.29% 0.31% 0.90 -0.6248 5.1278 0.62
(3.02) (3.06)
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Some successful Australian funds
Fund
Highwater mark on a
loss
Value of holdings on a loss
Cost basis on
a loss
Value above
highwater mark Rsq
1 0.0004 -0.0266 0.0327 -0.0119 0.0442
(0.21) (-2.39) (2.19) (-0.86)
2 0.0346 -0.1301 0.0300 -0.8614 0.3924
(2.97) (-6.45) (2.29) (-9.52)
3 0.0366 -0.1125 0.0216 -0.9771 0.6098
(2.58) (-6.02) (1.57) (-33.69)
16 0.6981 -0.9135 0.0167 -0.6133 0.1406
(0.69) (-2.06) (0.13) (-0.91)
27 -0.0712 -0.3305 -0.1205 -1.3277 0.3930
(-0.71) (-4.18) (-2.02) (-2.32)
36 -0.0226 -0.0973 -0.0935 -1.0166 0.3947
(-0.55) (-2.38) (-2.08) (-2.52)
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Sharpe ratio and doubling
0
0.05
0.1
0.15
0.2
0.25
-8 -6 -4 -2 0 2 4 6
t-value of value on a loss
Sha
rpe
ratio
of w
eekly
retu
rns
![Page 56: Double or nothing: Patterns of equity fund holdings and transactions](https://reader035.fdocuments.us/reader035/viewer/2022070404/56813b62550346895da45e19/html5/thumbnails/56.jpg)
Do managers lack an equity stake?
0
0.05
0.1
0.15
0.2
0.25
-8 -6 -4 -2 0 2 4 6
t-value of value on a loss
Sha
rpe
ratio
of w
eekly
retu
rns
![Page 57: Double or nothing: Patterns of equity fund holdings and transactions](https://reader035.fdocuments.us/reader035/viewer/2022070404/56813b62550346895da45e19/html5/thumbnails/57.jpg)
Is fund owned by a bank or life insurance company?
0
0.05
0.1
0.15
0.2
0.25
-8 -6 -4 -2 0 2 4 6
t-value of value on a loss
Sha
rpe
ratio
of w
eekly
retu
rns
![Page 58: Double or nothing: Patterns of equity fund holdings and transactions](https://reader035.fdocuments.us/reader035/viewer/2022070404/56813b62550346895da45e19/html5/thumbnails/58.jpg)
Is fund one of 10 largest in Australia?
0
0.05
0.1
0.15
0.2
0.25
-8 -6 -4 -2 0 2 4 6
t-value of value on a loss
Sha
rpe
ratio
of w
eekly
retu
rns
![Page 59: Double or nothing: Patterns of equity fund holdings and transactions](https://reader035.fdocuments.us/reader035/viewer/2022070404/56813b62550346895da45e19/html5/thumbnails/59.jpg)
Is fund large (not a boutique manager)?
0
0.05
0.1
0.15
0.2
0.25
-8 -6 -4 -2 0 2 4 6
t-value of value on a loss
Sha
rpe
ratio
of w
eekly
retu
rns
![Page 60: Double or nothing: Patterns of equity fund holdings and transactions](https://reader035.fdocuments.us/reader035/viewer/2022070404/56813b62550346895da45e19/html5/thumbnails/60.jpg)
Style and return patterns
Category Beta
Treynor Mazuy
measure
Modified Henriksson
Merton measure
Number of observatio
ns
GARP
0.96347
-0.01105(-2.30)
-0.08989(-2.52)
2395
Growth
1.03670
-0.00708(-1.53)
-0.03762(-1.15)
1899
Neutral
1.02830
-0.00110(-0.29)
-0.02092(-0.71)
1313
Other
1.00670
-0.00196(-0.53)
0.00676(0.21)
640
Value
0.76691
-0.01215(-1.93)
-0.10350(-2.24)
2250
Passive/Enhanced
1.01440
0.00692(1.51)
0.04593(1.47)
859
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Style and trading patterns
Category
Highwater
mark on a loss
Value of holdings on a loss
Cost basis on
a loss
Value above
highwater mark Rsq
GARP 0.0086 -0.0584 0.0028 -0.7957 0.4281
(2.45) (-7.93) (0.58) (-5.30)
Growth 0.0352 0.0291 -0.0498 -0.3429 0.1339
(1.04) (0.99) (-1.66) (-0.92)
Neutral 0.0005 -0.0208 0.0035 -0.2161 0.0341
(0.07) (-1.89) (0.35) (-3.69)
Other 0.0277 -0.0242 -0.0074 -0.0712 0.0586
(1.84) (-1.75) (-0.60) (-0.60)
Value -0.0006 0.0081 -0.0104 -0.1172 0.0113
(-0.07) (0.88) (-1.28) (-1.85)
Passive/ Enhanced
0.0901 -0.0769 0.0535 -0.2307 0.0089
(2.06) (-1.54) (1.61) (-0.98)
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Size and return patterns
Category Beta
Treynor Mazuy
measure
Modified Henriksson Merton measure
Number of observation
s
Largest 10 Institution
al Manager
No
0.9627
-0.00645(-2.25)
-0.05037(-2.34)
6100
Yes
0.8819
-0.01306(-2.60)
-0.10095(-2.92)
2397
Boutique firm
No
0.9322
-0.01029(-3.12)
-0.07616(-3.23)
5709
Yes
0.9556
-0.00452(-1.25)
-0.04184(-1.49)
2788
![Page 63: Double or nothing: Patterns of equity fund holdings and transactions](https://reader035.fdocuments.us/reader035/viewer/2022070404/56813b62550346895da45e19/html5/thumbnails/63.jpg)
Size and trading patterns
Category
Highwater
mark on a loss
Value of holdings on a loss
Cost Basis
Value above
highwatermark Rsq
Largest 10 Institution
al Manager
No 0.0384 0.0250 -0.0443 -0.4393 0.0630
(1.36) (0.92) (-1.62) (-1.26)
Yes 0.0077 -0.0159 0.0011 -0.7627 0.3017
(2.05) (-3.01) (0.24) (-4.82)
Boutique firm
No 0.0015 -0.0040 -0.0093 -0.7502 0.1607
(0.24) (-0.44) (-1.03) (-4.75)
Yes 0.0097 -0.0270 -0.0184 -0.2847 0.0751
(0.66) (-1.42) (-1.07) (-4.23)
![Page 64: Double or nothing: Patterns of equity fund holdings and transactions](https://reader035.fdocuments.us/reader035/viewer/2022070404/56813b62550346895da45e19/html5/thumbnails/64.jpg)
Incentives and return patterns
Category Beta
Treynor Mazuy
measure
Modified Henriksson
Merton measure
Number of
observations
Annual Bonus
No
0.9819
0.00013(0.03)
0.01233(0.35)
308
Yes
0.9386
-0.00857(-3.32)
-0.06720(-3.56)
8189
Domestic owned
No
0.9739
-0.00990(-2.80)
-0.07282(-2.79)
4262
Yes
0.9053
-0.00652(-1.86)
-0.05557(-2.18)
4235
Equity Ownershi
p by senior staff
No
0.9322
-0.01029(-3.12)
-0.07616(-3.23)
5709
Yes
0.9556
-0.00452(-1.25)
-0.04184(-1.49)
2788
![Page 65: Double or nothing: Patterns of equity fund holdings and transactions](https://reader035.fdocuments.us/reader035/viewer/2022070404/56813b62550346895da45e19/html5/thumbnails/65.jpg)
Incentives and return patterns
Category
Highwater
mark on a loss
Value of
holdings on a loss
Cost Basis
Value above
highwater Rsq
Annual Bonus
No 0.0259 -0.0233 -0.0026 0.0388 0.0420
(1.52) (-1.55) (-0.20) (0.25)
Yes 0.0016 -0.0040 -0.0093 -0.7493 0.1601
(0.25) (-0.45) (-1.04) (-4.74)
Domestic owned
No 0.0025 0.0265 -0.0395 -0.0756 0.1229
(0.48) (1.24) (-1.57) (-0.95)
Yes 0.0148 -0.0228 0.0069 -0.9023 0.2063
(2.21) (-2.79) (0.99) (-12.68)
Equity Ownershi
p by senior staff
No 0.0015 -0.0040 -0.0093 -0.7502 0.1607
(0.24) (-0.44) (-1.03) (-4.75)
Yes 0.0097 -0.0270 -0.0184 -0.2847 0.0751
(0.66) (-1.42) (-1.07) (-4.23)
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National Australia Bank
![Page 67: Double or nothing: Patterns of equity fund holdings and transactions](https://reader035.fdocuments.us/reader035/viewer/2022070404/56813b62550346895da45e19/html5/thumbnails/67.jpg)
Incentives are not everything!
No evidence of doubling in asset allocation
Large institutional funds are organized and compensated on a specialist team basis
Behavioral explanations:Prospect theoryNarrow framing
![Page 68: Double or nothing: Patterns of equity fund holdings and transactions](https://reader035.fdocuments.us/reader035/viewer/2022070404/56813b62550346895da45e19/html5/thumbnails/68.jpg)
Conclusion
Informationless investing can be dangerous to your financial health
Funds as a whole do not seem to use these techniques
However, some of most successful funds have interesting trading patterns … associated with
Large, decentralized controlShort term incentive compensation