Now showing 1 - 1 of 1
  • Publication
    Three Essays in Fund Management
    (Universität St. Gallen, 2022-09-19)
    In the first paper, Hidden Alpha, using the setting of financial agents, we explore the importance of hidden connections relative to all other network connections. We find that hidden connections are those associated with the largest and most significant abnormal returns accruing to fund managers. This is relative to insignificant abnormal returns accruing to all other trades, including to trades of publicly observable connections in the fund manager-firm officer network. The hidden connection premium does not appear to be driven by endogenous selection or familiarity, as fund managers seem to be correctly timing when to hold and when to avoid their friends' stocks. Further, the more hidden the connection is, the more valuable the information that appears to be associated with the trading across it. More broadly, our findings highlight the importance of missing nodes and hidden edges when attempting to understand the true nature of shock propagation in complex network systems. In the second paper, In Military We Trust: The Effect of Managers Military Background on Mutual Fund Flows, we take a mutual fund investor's point of view. We address the question why investors continue to pay such high fees to fund managers and advisers, although actively managed funds have long been shown to underperform passive investments. The paper reveals that trust-building characteristics of fund managers affect purchase decisions of mutual fund investors. We exploit variation in fund managers prior affiliations with the U.S. military, a well-trusted institution, and relate it to fund flows. We find that funds with ex-military managers have significantly higher flows relative to other funds. In the third paper, The Social Side of Investing: Fund Manager Networks and Portfolio Choice, I reveal private social networks among U.S. mutual fund managers and examine how network characteristics affect portfolio choice. I find that managers who are socially connected have more similar holdings and trades even after controlling for their location and employer. Stocks purchased together and simultaneously by managers within a network exhibit positive risk-adjusted returns suggesting that valuable information is shared through social interactions. Managers who are more central in a network tend to have higher risk-adjusted returns.