Is the active fund management industry concentrated enough?

Abstract(#br)We introduce a theoretical model of the active fund management industry (AFMI) in which performance and size depend on the AFMI’s competitiveness (concentration). Under plausible assumptions, as AFMI’s concentration decreases, so do fund managers’ incentives for exerting effort in search of alpha. Consequently, managers produce lower gross alpha, and rational investors, inferring lower expected AFMI performance, allocate a smaller portion of their wealth to active funds. Empirically, we find that a decrease in the US mutual fund industry concentration over our sample period is associated with a decrease in its net alpha and size (relative to stock market capitalization)

International Review and Advisory Committee

n/

Lest we forget: learn from out-of-sample errors when optimizing portfolios

Portfolio optimization often struggles in realistic out-of-sample contexts. We de-construct this stylized fact, comparing historical forecasts of portfolio optimization inputs with subsequent out of sample values. We confirm that historical forecasts are imprecise guides of subsequent values but also find the resulting forecast errors are not entirely random. They have predictable patterns and can be partially reduced using their own history. Learning from past forecast errors to calibrate inputs (akin to empirical Bayesian learning) results in portfolio performance that reinforces the case for optimization. Furthermore, the portfolios achieve performance that meets expectations, a desirable yet elusive feature of optimization methods.info:eu-repo/semantics/submittedVersio

Development and Freedom as Risk Management

Amartya Sen has argued that many development and freedom measures such as health, education, political and civil liberties are important constituents of human welfare. We concur with Sen and conjecture that an important reason these measures affect human welfare is because they allow individuals to better cope with risk and uncertainty that cannot be hedged using market based insurance mechanisms. We find some empirical support for this conjecture in that the volatility of consumption growth appears to be negatively related to life expectancy, political rights, and property rights (but is positively related to the rate of literacy) after controlling for the size of the country, per capita income, and openness to trade and capital flows, (which, as one would expect, also reduce consumption growth volatility) in cross-country panel regressions