Richard B. Evans

What Do Consumers’ Fund Flows Maximize? Evidence from Their Brokers’ Incentives

We ask whether mutual funds’ flows reflect the incentives of the brokers intermediating them. The incentives we address are those revealed in statutory filings: the brokers’ shares of sales loads and other revenue, and their affiliation with the fund family. We find significant effects of these payments to brokers on funds’ inflows, particularly when the brokers are not affiliated. Tracking these investments forward, we find load sharing, but not revenue sharing, to predict poor performance, consistent with the different incentives these payments impart. We identify one benefit of captive brokerage, which is the recapture of redemptions elsewhere in the family.

Scale Effects in Mutual Fund Performance: The Role of Trading Costs

Berk and Green (2004) argue that investment inflow at high-performing mutual funds eliminates return persistence because fund managers face diminishing returns to scale. Our study examines the role of trading costs as a source of diseconomies of scale for mutual funds. We estimate annual trading costs for a large sample of equity funds and find that they are comparable in magnitude to the expense ratio; that they have higher cross-sectional variation that is related to fund trade size; and that they have an increasingly detrimental impact on performance as the funds relative trade size increases. Moreover, relative trade size subsumes fund size in regressions of fund returns, which suggests that trading costs are the primary source of diseconomies of scale for funds.

A two-way parabolic equation that accounts for multiple scattering.

A two-way parabolic equation that accounts for multiple scattering is derived and tested. A range-dependent medium is divided into a sequence of range-independent regions. The field is decomposed into outgoing and incoming fields in each region. The conditions between vertical interfaces are implemented using rational approximations for the square root of an operator. Rational approximations are also used to relate fields between neighboring interfaces. An iteration scheme is used to solve for the outgoing and incoming fields at the vertical interfaces. The approach is useful for solving problems involving scattering from waveguide features and compact objects.

The Portfolio Choices of Young and Old Active Mutual Fund Managers

We examine the optimal portfolio choices of young and old fund managers in a calibrated dynamic life-cyle model of the active manager’s investment problem. The optimal policies of any manager depend on age, the wealth to labor income ratio, the value of the manager’s private information, and recent past performance relative to the benchmark. While age differences alone (with or without learning) do not generate significant differences in the optimal choices of young and old managers, both age combined with wealth and the introduction of learning have an economically significant effect on optimal managed portfolio choices. Simulations of the optimal managed portfolio returns produces measurable differences in the portfolio returns of young versus old managers when we also condition on either wealth or prior performance.

Stepwise coupled mode scattering of ambient noise by a cylindrically symmetric seamount

The question of how underwater ambient noise, at low frequencies, interacts with seamounts is addressed. The vertical directivity of the ambient noise, with and without the seamount interaction, is of particular interest. The problem of ambient noise scattering by seamounts motivates the development of a numerical modeling procedure, based on stepwise coupled modes. The procedure is designed to analyze scattering from a cylindrically symmetric seamount. The stepwise coupled mode procedure is extended to more general boundary conditions and brought up to date in the process. An example, using the geometry of the Dickins seamount, suggests that the seamount removes energy from the steeply traveling ambient noise, for this case. The energy is not converted into angles near the horizontal; the energy is lost through bottom interaction and attenuation.

Outsourcing vs. Integration in the Mutual Fund Industry: An Incomplete Contracting Perspective

With detailed product- and firm-level data for mutual funds, we study why mutual fund families relinquish control of fund management (advising) and outsource to non-affiliated entities and why those entities agree to manage for the fund family. Fund families and fund advisors cannot write enforceable contracts over the return earned by the fund (task of the advisor) and the size of the fund to be raised (task of the fund family). Our empirics confirm key tenets of the incomplete contracting view of the firm’s boundaries. Expertise drives the fund family’s decision to manage funds internally or not. The closer the fund is to its core expertise, the more critical the fund family is for the operation of the fund, and the more likely the fund is managed internally. Access to investors drives the advisor’s decision to manage assets for an unaffiliated fund family. Consistent with sharing marginal revenue under outsourcing, outsourced funds on average are smaller and also have lower returns than internally managed funds. At the same time, from the perspective of the fund family and the advisor, once the selection bias of the family of fund’s decision to outsource and the advisor’s decision to agree to that outsourced arrangement are controlled for, the difference in size and returns between internally and externally managed funds disappear. In other words, because of their lack of expertise, the fund family would not be able to earn a higher return by managing the outsourced funds internally and because of their lack of access to investors, the advisor could not raise a larger fund.

Vertical directivity of ambient noise in the presence of internal waves

Near surface sources of ambient noise, such as shipping and wind, excite only steeply traveling sound waves. After a sufficient range, the steepest are stripped away by loss mechanisms, such as bottom interaction. Consequently, the vertical directivity of surface generated noise is expected to be peaked about two (up‐ and down‐going) angles with very little contribution near the horizontal. This expectation is not always met in measurements. A possible explanation, for the noise at the horizontal, is the random scattering of the up‐ and down‐going waves by volume inhomogeneities caused by internal waves. The purpose of this paper is to demonstrate the validity of this hypothesis. The coupled power theory of Dozier and Tappert [J. Acoust. Soc. Am. 63, 353–365 (1978)], in an updated form, is applied to the calculation of noise due to distant near surface sources. The vertical directivity of the resultant field is shown to demonstrate that internal wave scattering can produce noise at the horizontal. Rough s...

A Legendre-Galerkin spectral method for constructing atmospheric acoustic normal modes.

A Legendre-Galerkin spectral method is applied to the construction of atmospheric acoustic normal modes above level ground, represented by a complex impedance. A search in the complex plane for modal eigenvalues is replaced by a complex symmetric matrix eigenvalue problem. The Legendre-Galerkin spectral method projects the acoustic normal modes onto an orthogonal basis of Legendre polynomials. The matrix eigenvalue problem can be solved by readily available, public domain, software. Prior knowledge of the location of a set of nearby real eigenvalues is unnecessary since the complex symmetric matrix formulation embodies an approximation of all of the physical constraints of the problem. The normal modes are used to compute the acoustic field, due to a harmonic point source in the atmosphere, including a group of discrete modes radiating into the upper atmosphere, usually associated with the continuous spectrum. The validity of the acoustic field calculation is tested in a comparison with the fast field program and interpreted, with aid of the normal modes, in a downward-refracting atmosphere.

ETF Short Interest and Failures-to-Deliver: Naked Short-Selling or Operational Shorting?

We identify an alternative source of ETF shorting related to the market maker liquidity provision and creation/redemption activities. This “operational shorting” arises due to a regulatory exemption, allowing ETF market makers to satisfy excess demand in secondary markets by selling ETF shares that have not yet been created. We find that operational shorting is associated with improved liquidity and greater price efficiency in the underlying securities held by an ETF, and with short-term return reversals consistent with liquidity supplying motives rather than informed trading. Delayed ETF creation to cover operational shorts results in failures to deliver and is found to be a valuable option in the presence of a liquidity mismatch between the ETF and the underlying securities. Operational shorting can lead, however, to increased counterparty risk and trading linkages between liquidity providers. We document a commonality in operational shorting across ETFs that share the same lead market maker and find that financial leverage can amplify this commonality.

Atmospheric acoustic modes between a complex ground impedance and an artificial absorber

Atmospheric acoustic normal mode computer codes are faced with finding the complex modal eigenvalues. Searching in the complex plane is difficult and requires special numerical techniques and custom software. A Legendre-Galerkin technique that reduces the problem to a complex matrix eigenvalue problem can be solved by commercially available software. This proposed Legendre-Galerkin method is described as the projection of the acoustic normal mode problem onto a recombined basis of Legendre polynomials. The modal approach is best suited for providing benchmark quality results in cases when guided modes dominate the problem. Such results are useful in establishing the validity and interpreting the characteristics of atmospheric acoustic fields computed with the parabolic equation method, for the same problem. The Legendre-Galerkin method is applied to cases with a ground based duct and an elevated duct. Measured wind speeds, from a costal experiment, provide the effective downwind and upwind sound speed pro...