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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27265
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| Title: | INFORMATIONLESS TRADING |
| Authors: | Brown, Stephen J.
Gallagher, David R.
Steenbeek, Onno
Swan, Peter L. |
| Keywords: | Informationless Trading
Sharpe Ratios
Performance Evaluation |
| Issue Date: | 8-Jan-2004 |
| Series/Report no.: | FIN-03-035 |
| Abstract: | The recent paper by Goetzmann et al. (2002) suggests that fund managers
subject to a performance review have an adverse incentive to engage in
portfolio strategies that have the unfortunate attribute that they can
expose the fund investor to significant downside risk. Weisman (2002)
uses the term “informationless investing” to describe this
behavior, and argues that these strategies are “peculiar to the
asset management industry in general, and the hedge fund industry in
particular” and that these strategies “can produce the
appearance of return enhancement without necessarily providing any
value to an investor.” Just how prevalent are these practices in
the fund management business? On the basis of a unique database of daily
transactions and holdings of a set of forty successful Australian equity
managers, we find evidence that individual managers do engage in this
trading behavior, particularly when they form part of a team within a
large decentralized money management operation and are compensated in
the form of an annual bonus based on performance. This result is broadly
consistent with the theoretical and empirical results of the principal
agent literature which highlight the adverse consequences for the long
term objectives of principals where agents are compensated based on
observable short term performance. It is also consistent with recent
results from the behavioral finance literature which suggest that agents
narrowly focus on individual security gambles independent of overall
portfolio value considerations. |
| URI: | http://hdl.handle.net/2451/27265 |
| Appears in Collections: | Finance Working Papers
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