Essays on managed portfolios
The investment management industry has grown substantially within the last ten years, and managed portfolios are currently over the $3 trillion asset level in the United States alone. In addition to traditional stock and bond funds, investors are placing funds in alternative asset classes such as commodity or managed futures funds and pools. A large number of academic studies exist that analyze the performance of managed portfolios. Even so, there are a number of issues that remain unresolved.
The first essay focuses on determining the relationship between aggregate fund flows and securities returns. Previous studies on this topic do not incorporate competing asset classes, do not separately analyze equity sub-classifications, or use data during time periods when fund flows were a small fraction of what they are today. Time series and causality testwork are performed on the dynamic nature of the relationship between aggregate fund flows and market returns. We find evidence to support the hypothesis that fund flows tend to follow returns, but limited evidence to support the popular notion that fund flows "drive" markets. When aggregate equity flows are conditioned upon fund classifications, we find that the category flow determinants differ based upon risk classification. Finally, we find that the competing asset classes matter both statistically and economically in explaining aggregate fund flows for the majority of fund flow categories.
The second essay concentrates on the performance of individual equity commodity trading advisors (CTAs), who focus on trading futures contracts for their clientele. To date, few studies have been performed that look formally at the performance abilities and sources of returns of individual equity CTAs. This essay uses a well-known econometric model and downside risk measures to evaluate the timing ability and performance of equity-based CTAs. In addition to examining stand-alone performance, CTA inclusion in broad-based equity portfolios is studied and compared to alternative downside risk reduction strategies, such as a protective put. Finally, performance persistence is evaluated for these individual CTAs. In general, we find equity-based Commodity Trading Advisors do not exhibit market timing or security selection skills; nor is performance consistent among investment vehicles. However, this investment class does exhibit characteristics consistent with downside risk protection, especially when compared with traditional portfolio insurance models.