Fund Manager Co-Investment and Mutual Fund Risk Taking

Summary

This research summary reviews a study of whether mutual fund managers’ personal investments in their own funds are related to fund risk. Using disclosures of investment ranges, fund holdings, and risk measures for actively managed U.S. equity funds from 2007 to 2014, the study reports that manager co-investment is associated with lower subsequent portfolio risk. It measures changes in risk using holdings-based estimates and also examines total volatility, market beta, and downside beta.

The reported association is stronger when managers may have greater incentives to take risk, including convex flows tied to performance, poor past results, short tenure, or compensation not linked to long-term performance. The article interprets this pattern as consistent with co-investment reducing agency conflicts by aligning managers’ financial exposure with investors’. The evidence is observational and based on historical U.S. funds; disclosed investment ranges are converted into estimates, and the summary cautions that the findings do not establish causation or guarantee future outcomes.

Key ideas

• The study links manager investment in their own funds with lower subsequent risk measures.
• It uses holdings-based risk-change measures alongside volatility and beta measures.
• The association is stronger in settings associated with stronger incentives to take risk.
• Co-investment may align managers’ incentives with investors, though the evidence is observational.
• The sample covers actively managed U.S. equity funds from 2007 to 2014.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.