Three Essays in Asset Management.

Summary The first chapter shows that the returns of funds invested in illiquid stocks ("illiquid funds") are better than those of funds invested in liquid stocks. This difference stems from the ability of illiquid funds to select stocks. Stocks held by illiquid funds perform better than portfolios that have the same characteristics. Liquid funds report benchmarks against which their returns are greater. A portfolio of stocks held by illiquid funds performs better than a portfolio of stocks held by liquid funds. The second chapter documents a predictability of returns. In this chapter, opportunity periods are periods when the returns of stocks that are regularly analyzed by analysts (the tracked stocks) deviate from those of stocks that are not tracked (the neglected stocks). Subsequent returns on easily valued stocks are greater when opportunities were great, compared to periods when opportunities were limited. This behavior is consistent with a model where investors demand a premium to bear the risk of adverse selection. The third chapter explores when investment funds change their investment style (style is defined as risk exposure, taking into account the usual risk factors). Funds do not take more risk when it would be more profitable to do so. After having had bad returns, funds move towards the style of similar funds, but which have had good returns. The style of young funds deviates from the style of older funds. New fund managers deviate from the style of funds with old managers. When a fund takes more risk on one side, it does not try to systematically address the other sides of the risk.