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on Corporate Finance |
| By: | Huberman, Gur |
| Abstract: | Although established money managers operate in an environment which seems competitive, they also seem to be very profitable. The present value of the expected future profits from managing a collection of funds is equal to the value of the assets under management multiplied by the profit margin, assuming that the managed funds will remain in business forever, and that there will be zero asset flow into and out of the funds, zero excess returns net of trading costs, a fixed management fee proportional to the assets under management and a fixed profit margin for the management company. A profit margin of 30% seems empirically reasonable, but money management companies seem to trade at 2-4% of assets under management. Attempts to reconcile the two figures are not compelling, which is disturbing considering the centrality of the present value formula to finance and economics. Another computation suggests that holders of actively managed funds typically lose about 12% (18%) of their assets if they hold the fund for 20 (30) years, as compared with a loss of less than 3% (5%) for low-cost index fund investors for similar holding periods. |
| Keywords: | managed fund; money manager; trading |
| JEL: | G10 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6531&r=cfn |
| By: | Dorn, Daniel; Huberman, Gur |
| Abstract: | The preferred risk habitat hypothesis, introduced here, is that individual investors select stocks with volatilities commensurate with their risk aversion; more risk-averse individuals pick lower-volatility stocks. The investors' portfolio perspective overlooks return correlations. The data, 1995-2000 holdings of over 20,000 customers of a German broker, are consistent with the predictions of the hypothesis: the portfolios contain highly similar stocks in terms of volatility, when stocks are sold they are replaced by stocks of similar volatilities, and the more risk averse customers indeed hold less volatile stocks. Cross-sectionally, the more risk averse investors also have a stronger tendency to invest in mutual funds. Major improvements in diversification are concentrated during periods when investors add money to their account. |
| Keywords: | preferred risk habitat; risk; risk aversion; stock portfolio; volatility |
| JEL: | G10 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6532&r=cfn |