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Researchers Find Change in Ownership Policy Spurs Alpha

In April 2004, the SEC implemented a requirement for funds to disclose the level of ownership of portfolio managers in the funds they manage. Since that time, researchers have found that the level of fund manager ownership predicts risk-adjusted future performance in the fund. A new paper from Thorsten Martin and Florian Sonnenburg builds upon this research and asks whether the effect is actually due to the ownership level or rather other “unobserved fund characteristics” and whether requirements for ownership can be used to increase fund performance.

The pair reviewed U.S. equity mutual funds from 2005 to 2011 to study the “relationship between ownership changes and changes in future risk-adjusted fund performance using a hand-collected panel data set on mutual fund manager ownership.” The study found that a one standard deviation increase in ownership results in a 1.6 percent increase in alpha.

The researchers also addressed the question of whether there is a positive correlation because the fund manager is merely investing in funds that she believes will outperform and refraining from investing in those that do not, where that option is available. They reviewed fund families with policies that required the managers to have ownership in all funds that they manage and found that when managers increased ownership with the adoption of such a policy, the alpha of those funds increased an additional 0.4 to 0.5 percentage points. The study further finds that “[m]anagers who increase ownership simultaneously to the adoption of a family wide ownership requirement increase their active share, turnover, unobserved actions and their equity holdings and decrease their cash holdings.”