Fund management companies tend to employ their best people in inefficient markets – and these are not your everyday markets. Everyday markets seem to be too efficient.
By Patrick Bernau
Are markets efficient? This hypothesis has become very controversial in the last years. I still like it, as I have repeatedly pointed out. Regarding markets as inefficient would require one thing: There must be some people who are able to consistently outperform the market. They must have a track record which is better than the track record people can get by pure chance. For Western markets, such people are hard to find – and it is even harder to proof that their success is not due to chance. (Interestingly, it is easy to find many fund managers who are worse than the markets.)
But now there is a new paper looking at empiric data. The study has been conducted by researchers of the Centre for Financial Research at Cologne University: Jieyan Fang, Alexander Kempf, and Monika Trapp. They do not calculate fund managers’ yields (this has been done before) – instead the authors take a look at who are the fund managers, how and where do they work.
Fang et al. ask: How are fund managers allocated? They try to measure the skill of fund managers and analyze where these fund managers are employed. In their study, the authors focus on bond markets. This is an asset category which has produced a bubble quite recently, the Euro crisis: Greek government bonds were priced far too high for far too long. But is this bubble a sign of an inefficient market? “By and large, western bond markets are efficient”, says the study’s co-author Alexander Kempf.
In order to get a proxy for the fund managers’ skills, Fang et al. use education for young fund managers (What is the manager’s alma mater? What is his GMAT score?) and past performance for more experienced managers.
Their finding is striking: Mutual fund companies tend to employ their most promising and most successful fund managers in difficult markets in which they can really earn money – and this is not standard western bond markets, but High Yield markets. Although Standard (Investement Grade) bond markets have higher volume, fund companies tend to employ their young, inexperienced and lesser-skilled fund managers on these markets.
It looks like skill doesn’t help too much on these markets.
The photo (source: dapd) shows the German stock market.