Research Areas:

Asset management; investments; institutional investors; international finance; geography of finance.


7. On the Anomaly Tilts of Factor Funds (with Fabio Moneta), 2024, Financial Management, forthcoming.

Abstract: By analyzing portfolio holdings, we find that a significant subset of Hedged Mutual Funds (HMFs) and smart-beta Exchange-Traded Funds (ETFs) tilt their portfolios towards well-known anomaly characteristics and that such tilts are highly persistent. Short positions of HMFs are important for amplifying their factor tilts. Moreover, HMFs with large factor tilts outperform corresponding ETFs, or HMFs with contrary tilts, both before and after accounting for implementation costs and fees. We link this outperformance to the use of short positions and higher factor-related returns. Finally, we show that only HMFs achieve similar performance (net of costs) as the academic factors.

6. The Geography of Sub-advisors, Managerial Structure, and the Performance of International Equity Mutual Funds (with Michael Densmore, and Pauline Shum), 2023, Review of Asset Pricing Studies, 13 (2), 343–374.

Abstract: We study whether sub-advising abroad provides an information advantage that improves the performance of international equity mutual funds. We find that it does not. In fact, internationally outsourced funds underperform on a risk-adjusted basis by up to 162 bps annually. The underperformance is concentrated in funds managed by single sub-advisors, who are less likely to be terminated after poor performance compared to funds with multiple sub-advisors. We dissect fund performance by the location of its sub-advisors and find that international sub-advisors underperform primarily in their local holdings. Finally, we show that the industry is nonetheless on a path towards equilibrium.

5. Industry Co-agglomeration, Executive Mobility and Compensation (with Debarshi Nandy and Yisong Tian), 2023, Review of Quantitative Finance and Accounting, 61, 817–854.

Abstract: We find evidence of geographic segmentation in the market for top executives and identify industry co-agglomeration as the primary driver. When top executives move from one firm to another, nearly 40% of the moves are between local firms, which is more than five times greater than predicted by available employment opportunities. Furthermore, these local moves are dominated by moves among firms in co-agglomerated industries. While the strong local move bias is also accompanied by local co-movement in the compensation of top executives, the co-movement is driven by local peers in co-agglomerated industries only but not by other local peers.

4. Naïve Style-level Feedback Trading in Passive Funds, 2022, Journal of Financial and Quantitative Analysis, 57(3), 1083-1114.

Abstract: Passive Exchange-Traded Funds (ETFs) are ideally suited to style-level feedback trading because of their high liquidity, ease of short-selling, and pure play on investment styles. I find strong evidence of short-term style momentum trading in ETFs. Institutional investors that use ETFs do not act as arbitrageurs by trading against style momentum. Institutions, especially less sophisticated ones, are themselves style momentum traders. Moreover, recent style-level demand predicts style-level return reversals. These findings suggest that uninformed positive feedback trading by less sophisticated market participants can destabilize financial markets in the short run.

3. Local Demand Shocks, Return Predictability and Excess Comovement, 2020, Journal of Banking & Finance, 119.

Abstract: I investigate the importance of local demand shocks on excess comovements and return predictability for 4560 twin-pairs of Exchange-Traded Funds (ETFs) from 15 country-pairs. The returns on ETFs traded in the same country comove excessively with one another. These comovements are stronger for funds with greater liquidity and more competitors in the local market. In contrast, comovements are not materially different among ETFs that are attractive to fundamental (factor) investors. A local measure of mispricing, based on price-deviations between ETFs and their foreign peers, strongly predicts ETF return reversals. Betting against local mispricing yields significant abnormal returns of up to 20 percent per year after trading costs.

2. Relative Liquidity, Fund Flows and Short-term Demand: Evidence from Exchange-Traded Funds (with Pauline Shum), 2018, Financial Review, 53(1), 87-115.

Abstract: We show that highly liquid Exchange-Traded Funds (ETFs), especially those that are more liquid than their underlying basket of securities (i.e., positive relative liquidity), are particularly attractive to investors. Using three definitions of liquidity, we find that relative liquidity predicts net fund flows, as well as inflows and outflows positively and significantly. We further document a liquidity clientele amongst institutional investors: (i) relative liquidity is significantly more important for short- than for long-term investors; and (ii) relative liquidity is inversely related to investors’ average holding duration in the ETFs. These two findings provide evidence that relative liquidity encourages short-term demand.

1. Liquidity, Style Investing, and Excess Comovement of Exchange-Traded Fund Returns, 2016, Journal of Financial Markets, 30, 27-53.

Abstract: This study shows that exchange-traded fund (ETF) misvaluation — based on return differentials between ETFs and their net asset values (NAV) — comove excessively across ETFs. Excess comovements are positive (negative) and significant across ETFs in similar (distant) investment styles. Further tests based on return reversals suggest that misvaluation stems primarily from the ETF, rather than the NAV price. Excess comovements are greater for funds with high commonality in demand shocks and attractive liquidity characteristics. These findings are consistent with the idea that the high liquidity of ETFs attracts a clientele of short-horizon noise traders with correlated demand for investment styles.

Working Papers:

1. A U-Shaped Flow-Performance Sensitivity Across the Globe (with Kelley Bergsma Lovelace), 2024.

Abstract: Using a comprehensive sample of equity mutual funds from 23 countries, we document that the flow-performance sensitivity is greater for both top and bottom performance, compared to the middle. The sensitivity of outflows to bad performance is amplified in bear markets, during the COVID lockdown, and for funds holding illiquid assets. These results only hold over short return horizons (quarter or year), while at the three-year horizon the conventional convex flow-performance relationship prevails. Overall, our results are consistent with a first-mover advantage in redemptions after poor recent performance and the price impact externality of the manager’s forced sales.

2. The Value of Active Share and Conditioning Information in Global Equity Funds (with Jon Fulkerson), 2024.

Abstract: Global equity funds invest worldwide and seek to add value through stock, industry and country selection. Using a sample of nearly 3,000 funds from 19 developed markets, we provide out-of-sample evidence that active share predicts future performance in foreign portfolios. The performance comes from stock picking rather than country selection. However, a fund’s within-region active share only predicts superior performance in Europe and Asia-Pacific, and not in the United States. We link these variations in return predictability to whether managers trade on anomalies. The best active global managers are on the “right side” of anomalies.

3. Foreignness and the Incentive to Generate Alpha: Evidence from Offshore Cross-Border Mutual Funds, 2024.

Abstract: We analyze the performance and competitive position of European mutual funds domiciled offshore (in Ireland or Luxembourg) and sold in multiple countries across the world. These offshore cross-border funds are more actively managed and have a markedly stronger flow-performance sensitivity, which suggests a more sophisticated investor base and a greater incentive to generate alpha. Consistent with a skill-based argument, such funds consistently outperform relative to their onshore counterparts. Importantly, the return predictability of active management is up to twice as high for offshore cross-border funds. Finally, we rule out an alternative explanation based on a more diversified shareholder base.