活動內容

Topic

Mutual Fund Portfolio Constraints: Carrying Coals to Newcastle?

Speaker

Hong LIU

Fossett Distinguished Professor of Finance, Washington University in St. Louis

Abstract

Investors often impose shortsale and no-leverage constraints on many mutual funds. However, we rarely observe these constraints  bind in the portfolios of these funds. Are investors carrying coals to Newcastle? In a principle-agent optimal contracting framework in which risk-averse agents (managers) are protected by limited liability, we find that such constraints are necessary to curb managers’ excessive risk-taking as a result of limited liability. These constraints do not appear binding because there is an interior portfolio weight (between 0 and 1)  that is locally optimal, and the constraints transform it to become a constrained global optimum. Moreover, this “non-binding puzzle” is exclusive for “low-type” managers, which suggests a new indicator of investment skill.