Risk Shifting and Mutual Fund Performance
Mutual funds change their risk levels significantly over time. This paper investigates the performance consequences of risk shifting, as well as the economic motivations and the mechanisms of risk shifting. Using a holdings-based measure of risk shifting, we find that funds that increase risk perform worse than funds that keep stable risk levels over time. In addition, funds that expect higher benefits from risk shifting are more likely to increase risk and perform particularly poorly after increasing risk. Our results are consistent with the notion that agency problems, rather than the ability to take advantage of changing investment opportunities, are the likely motivation behind risk shifting behavior.
We thank Keith Brown, Jie Cao, Joe Chen, Jonathan Cohn, Ken French, W. Van Harlow, Marcin Kacperczyk, Sheridan Titman, Stefan Ruenzi, Pablo Ruiz-Verdu, Richard Stanton, and seminar participants at Georgia State University and the University of Texas at Austin for helpful comments and discussions. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Jennifer Huang & Clemens Sialm & Hanjiang Zhang, 2011. "Risk Shifting and Mutual Fund Performance," Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2575-2616. citation courtesy of