Manager’s Alpha or Fund’s Alpha?

To test whether a fund’s alpha is solely tied to the fund or if a manager’s ability influences alpha, I test for the presence of manager-specific fixed effects. This approach is similar to the one applied byBertrand and Schoar(2003). Identification of the manager fixed effects hinges on changes in management. If a manager only manages one fund and is present during the whole lifetime of the fund, the manager’s fixed effect is collinear with the fund fixed effect.

I drop these manager fixed effects and only estimate the remaining 86 manager fixed effects which are identified by either, the manager not being present for the whole lifetime of the fund, and/or the manager managing multiple funds. I regress funds’ monthly excess returns on the set of seven factors proposed by Fung and Hsieh (2004), manager fixed effects, and control variables to account for any other correlated drivers of abnormal returns:

xr_i,t =α_i+α_j^Mgr+X_tβ_i+T IM E_t+ Age_i,tγ+ AuM_i,tδ+ε_i,t. (2.1)

Where xr_i,t is the net excess return of fund i at time t, α_i is a fund-specific fixed effect, β_i are the fund-specific factor loadings of fund i on the seven factors proposed by Fung and Hsieh (2004), denoted byX_t. To control for any industry-wide heterogeneity in average performance across time, I include a full set of monthly time dummies (T IM E_t). Compatible with the theoretical model byBerk and Green(2004), there is evidence for a deterioration in performance over a fund’s lifetime. Thus, if the manager fixed effect correlates with the age of a fund this may introduce a bias in the estimate of the manager fixed effects. I control for the age of the fund in terms of the number of years passed since the fund’s first appearance in any database (Age_i,t). For a sample of mutual funds,Pastor, Stambaugh, and Taylor (2015) document diminishing returns to scale. Performance seems to be decreasing in the amount of assets under management. To make sure that this fact does not contaminate the results, I include the fund’s assets under management (AuM_i,t) in millions USD. α^Mgr_j denotes the manager-specific fixed effect.

To test for the presence of manager fixed effects, I test for the joint significance of α^Mgr_j using an F-test. Table 2.3 shows estimation results for four specifications of model (2.1).

Information on assets under management is only available for a subset of the sample, reducing the number of identifying changes of management to 41. Thus, I estimate the first three models without including the funds’ assets under management. Row (1) shows estimates including fund and manager fixed effects and the set of Fung and Hsieh (2004) factors.

A joint F-test on the manager fixed effects results in a test statistic equal to 1.89. The

Table 2.3: F-Tests for Manager Fixed Effects

This table shows test results of joint F-tests on the manager fixed effects in the following model:

xri,t=αi+α^Mgr_j +Xtβi+T IM Et+ Age_i,tγ+ AuMi,tδ+εi,t,

where xri,t is the net excess return of fund i at time t, αi is a fund-specific fixed effect, βi are the factor loadings of fund ion the seven factors proposed byFung and Hsieh (2004), denoted byXt. α^Mgr_j denotes the manager-specific fixed effect. Age_i,t denotes the age of the fund in terms of months passed since the appearance of the fund in any database. AuMi,t denotes the assets under management of the fund in millions. T IM Et is a full set of monthly time dummies. Model (1) only includes fund fixed effects and the sevenFung and Hsieh(2004) factors. Model (2) adds the age of the fund, model (3) adds the age and time dummies, while row (4) includes the fund’s assets under management (AuM). In the column “Manager Fixed Effects” the table shows the values of the test statistic for an F-test for the hypothesis of all manager fixed effects being jointly equal to zero. The corresponding p-value and the number of restrictions is displayed in parentheses. Columns “Age” and “AuM” show the estimated coefficient on the age and the assets under management of the fund and the corresponding t-statistics and p-values in parentheses.

Manager Fixed Effects Age AuM Time Dummies? N

(1) 1.89 (0.00, 86) - - No 15,365

(2) 1.81 (0.00, 85) -0.0917 (-6.43, 0.00) - No 15,365

(3) 1.69 (0.00, 66) -0.2496 (-0.52, 0.60) - Yes 15,365

(4) 2.38 (0.00, 41) -0.6145 (-0.59, 0.55) -0.0003 (-1.38, 0.17) Yes 9,804

hypothesis of all manager fixed effects being jointly equal to zero is rejected at the 1%

significance level. Row (2) includes the age of the fund as a control variable. Compatible with the theoretical model by Berk and Green (2004), the coefficient on the age of the fund is negative and statistically significant at the 1% level. This coefficient implies a decrease in monthly abnormal performance equal to 9.17 bps for every additional year the fund is alive. Controlling for age, the hypothesis of all manager fixed effects being jointly equal to zero is rejected at the 1% significance level with a test statistic equal to 1.81. Row (3) shows results for a model including time fixed effects. The significance of the manager fixed effects is robust to the inclusion of time fixed effects. However, the effect of age on abnormal performance turns statistically insignificant. When controlling for industry-wide trends in average abnormal performance, the age of a fund has no significant impact on abnormal performance. Row (4) shows estimates for a model including the fund’s assets

under management. The test statistic for the hypothesis of the manager fixed effects being jointly equal to zero increases and the hypothesis is rejected at the 1% significance level.

Besides, the coefficient on the assets under management has the expected negative sign but is not statistically significant. Thus, statistical significance of the managerial fixed effects does not seem to be an artifact of diminishing returns to scale.

There is statistical evidence for the presence of fixed effects tied to the manager. This result is robust to controlling for the fund’s age and assets under management, as well as to the inclusion of time fixed effects. The manager fixed effects are identified by either managers managing multiple funds and/or the turnover of management. In undocumented tests, I verify that the fund-fixed effects are jointly significant, showing that the average abnormal performance of a fund is indeed a mixture of fund-level and manager-level performance. In the next Section, I investigate the turnover event in more detail and estimate models for the structural breaks in abnormal returns and fund flows.