Essays on institutional investors

Lines, Anton (2017) Essays on institutional investors. Doctoral thesis, University of London: London Business School.

Abstract

In this dissertation, I explore the role of delegated asset managers in the financial economy - their role in setting asset prices, their response to incentives, and their ability to deliver abnormal returns. Chapter 1 argues that fund managers' compensation contracts, intended to align their incentives with those of and their clients, may have unintended negative consequences for asset prices. If investment performance is evaluated relative to a benchmark, institutions optimally rebalance their portfolios towards their benchmarks when volatility rises, putting downward price pressure on overweight stocks and upward pressure on underweight stocks in equilibrium. I find extensive support for these predictions using Form-13F institutional holdings data. Chapter 2 (joint with N. Naik and R. Di Mascio) finds that stocks purchased by institutional investors earn significant positive risk-adjusted returns that decline gradually over twelve months. This phenomenon can be explained by strategic trading behaviour, which delays incorporation of new private information into prices. Consistent with the predictions of Kyle-type models, managers build positions in small increments proportional to remaining alpha, buy more aggressively when the number of potential competitors and/or correlation among their information signals is high, and do not increase individual trade size after unexpected capital inflows. Trading alpha is negatively related to competition/correlation, also consistent with strategic trading. Finally, Chapter 3 (joint with N. Naik and R. Di Mascio) shows that trade-based performance metrics are better able to capture fund manager skill than portfolio-level alpha. Trade-based metrics are more persistent and are better able to forecast future alpha.