Dries Heyman

Good Luck, Bad Luck. Can Mutual Funds Really Pick Stocks?

The literature examining mutual fund performance is vast and researchers have studied the performance of professional money managers extensively, but there is still an ongoing debate whether or not mutual fund managers have stock picking skills. This article investigates the profitability of institutional trades using a unique dataset comprising the transactions executed by a sample of mutual funds during the years 2002-2007. We implement an innovative bootstrap technique to examine the non-normal distribution of our characteristics-based performance measure across the trades of mutual funds to precisely separate luck from skill. Moreover, we apply a new nonlinear technique based on cluster analysis to construct matching benchmark portfolios. Results indicate that, controlling for luck, a negligible minority of managers pick stocks well enough to beat the market. The underperformance of managers can mainly be attributed to ‘bad luck’, and not to the absence of genuine stock picking skills. Finally, funds trading in illiquid stocks with higher book-to-market ratio and smaller size perform better.

Individual Investors and Option Trading: Attention Grabbing Versus Long-Term Strategies

This paper analyzes trading records of online retail bank investors to examine whether attention-type events dominate return feedback strategies in explaining individual investors’ stock option trading decisions. We show that although individual investors are net buyers of common stock on abnormally high volume days, they follow contrarian investment strategies after extreme prior day stock price performance. Moreover, we find that individual investors especially exploit stock options to follow contrarian investment strategies in that they initiate over twice as many bullish-type (nearly half as many bearish-type) option contracts after extremely poor (good) prior-day returns. Further, we observe variance in contrarian behavior across investor types: extremely optimistic investors pursue contrarian investment strategies more (less) pronounced around highly negative (positive) prior day returns. Finally, we show that the same extreme optimists especially overweigh short-term compared to long-term return feedback information in making individual stock option trading decisions. Combined, this study provides novel insights in the dynamics of individual investors’ option trading decisions and in the distinctive roles of cognitive biases underlying this process.

An Anatomy of Institutional Trading Records

This paper explores a unique data set comprising the transactions executed by a large sample of mutual funds for the period August 2002 - April 2007. This data set qualifies as a worthy counterpart for another (often used) transactional data set provided by the Plexus Group. It will serve as input for various papers, but is interesting in its own right. We discuss the structure of the data set, we enumerate the major asset classes traded by the institutionals and we describe the global representation of the traded securities. Finally, we detail the filtering procedures necessary to obtain a sample of equity transactions executed by actively managed mutual funds.