Empirical essays on fund performance

Fernandes, Marcelo
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This dissertation comprises three chapters, each focusing on different aspects of mutual funds, with a particular emphasis on beta and its influence on survival rates, market timing, and performance. In the first chapter, “Examining the Influence of Beta on Mutual Fund Survival”, the research fills a gap by investigating the beta of funds that have ceased operation and those that remain active, using a Cox proportional hazards model. The findings reveal that beta, as a measure of market risk, is not a significant predictor of survival, with higher beta values indicating a greater likelihood of failure. In the second chapter, “Understanding the Hidden Patterns of Market Timing in Equity Funds”, takes a unique approach to examining market timing in equity funds, using daily data to estimate upside and downside betas and semibetas. This frequency allows for a direct estimation of dynamically varying betas, offering insights into equity funds’ market timing abilities. The investigation found negative evidence of general market timing ability but positive evidence in downside timing ability, reflecting the complex nature of market timing abilities. Also, the estimates of risk premiums reinforces the notion that investors price not just downside risk, but also upside potential and deviations from market alignment. Crucially, these findings highlight the keen interest of investors in aligning their portfolios with market movements. The statistical significance of both upside and downside semibetas, along with mixed-state terms, underscores the importance investors place on being on the same side as the market—whether it is trending up or down. Finally, in the third chapter, “The Harsh Reality of Fund Fees and Performance”, the last chapter provides a detailed examination of the performance of mutual equity funds, considering both gross and net returns. It explores whether the success achieved by the fund manager before fees is reflected in what the investor sees after fees. The study found that total yearly costs were 4.88% of the fund’s assets, meaning that for every 1 BRL net return, the investor had to pay 0.80 BRL in fees. Interestingly, while alpha showed significant changes between net and gross returns, beta remained fairly consistent, highlighting its sensitivity to market changes irrespective of fee structure. These findings provide essential insights for investment strategies and understanding the differences in how net and gross returns impact portfolio performance.

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