Essays on Mutual Funds and Fund Managers
No TL;DR found
Abstract
This dissertation comprises of three chapters on mutual funds. The first chapter establishes the role of managers in the deceptive practice of window dressing. Employing comprehensive career history of U.S. mutual fund managers, I find strong jointly significant manager fixed effects, which are robust after addressing endogenous matching concerns. I use the connected sample instead of the classical movers sample to substantially enlarge the sample size and reduce the selection bias that long exists in the stream of literature. The estimated manager fixed effects are significant in making out-of-sample predictions. Further I establish that mutual fund interlocks through common managers are important channels that spread window dressing. The second chapter studies the investment strategies of mutual funds regarding their use of credit default swaps (CDS). Matches between mutual funds CDS positions and their underlying portfolio in the holdings facilitate a new approach in identifying CDS strategies that complements the macro level analyses in the existing literature. I find risk reducing incentives are dominated by speculative incentives, especially those to increase credit exposure via naked short CDS contracts. Experienced fund managers tend to take on more credit risk, while female managers are more likely to hedge comparing with their male peers. The third chapter employs the collapse of Lehman Brothers and the resulting sudden closures of CDS positions as a natural experiment to examine the risk and performance implications of mutual funds CDS investments. Funds on average load up on a significant amount of tail risk by trading CDS. While CDS users benefit when market conditions are favorable, they suffer during periods of clustered defaults. Funds forced to resolve their Lehman CDS contracts exhibit persistent inferior performance in the post-crisis period comparing