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Measuring the impact of short and lending practices using the DGTW benchmarks
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Mutual fund managers increasingly lend their holdings and/or use short sales to generate higher returns for their funds. This project presents a first look into the impact these practices on performance using the performance measures: i) Characteristic
Selectivity (CS), the ability of the fund's managers to choose stocks that outperform
their benchmarks; ii) Characteristic Timing (CT), the ability of the manager to time the
market; iii) and Average Style (AS), the returns from funds systematically holding
stocks with certain characteristics. These returns are computed through the DGTW
benchmarks. The effect of other variables that have also been shown to impact fund’s
returns – total net assets under management, investment styles, turnover and expense
ratios – will also be analyzed. I find that managers who use short-sales do not exhibit
better stock picking abilities than those who do not, while mutual funds that lend do
present higher CS returns. In addition, while lending is not significant for the total performance of a fund, the employment of short-sales and of both short-sales and
lending has a negative impact on the fund’s performance.
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DGTW benchmarks Mutual funds performance Short-sales Lending