May 11, 2016
Iwan Meier, Associate Professor (Finance), won the 2015 Best Professional Paper award from Financial Markets and Portfolio Management. His paper, “Fund Performance and Subsequent Risk: A Study of Mutual Fund Tournaments Using Holdings-Based Data,” was co-authored with Aymen Karoui, a professor at ESG UQAM and an HEC Montréal alumnus himself (PhD 2009). The award, sponsored by the Zurich Cantonal Bank (ZKB), was presented at the annual conference of the Swiss Society for Financial Market Research.
The paper by professors Meier and Karoui addresses the hypothesis that there is a tournament-style behaviour among mutual fund managers. The hypothesis posits that fund managers with a poor midyear performance actively increase their portfolio risk in the second half of the year in an attempt to improve their ranking by year’s end. This behaviour is explained by the fact that the top-ranked funds at the end of the year attract more cash and hence more managed assets, meaning that the fund manager’s compensation may increase.
In their paper, professors Meier and Kaouri present a new breakdown of fund volatility, using data on semi-annual fund portfolio holdings. This methodology allows them to distinguish between passive risk changes that result from variations in stock prices and active changes that are due to fund managers’ trades. The empirical results show that changes in the return volatilities of mutual funds are largely explained by shifts in buy-and-holdportfolio volatility. Thus the authors conclude that managers’ behaviour has a limited impact on the return volatilities of the funds, and hence that there is little support for the tournament behaviour theory.
Iwan Meier and Aymen Karoui (photo of Professor Karoui: ESG UQAM)