Do Fund Managers Use Private Information in Their Asset Allocation Decisions? Evidence from Macroeconomic Announcements
52 Pages Posted: 7 Apr 2006
Date Written: January 20, 2006
We ask whether fund managers use private information about forthcoming macroeconomic announcements in their asset allocation decisions and whether those that more aggressively use this information outperform those that do not. We present the first evidence that fund managers possess and actively use private information about forthcoming macroeconomic announcements. Specifically, the net asset values (NAVs) of hybrid funds respond strongly to the surprises in macroeconomic announcements and there is a distinct asymmetry in the response to positive and negative surprises. More important, the average fund manager engages in significant reallocation across asset classes in the two days before and (partly) reverses his trades in the two days after a large number of announcements. Further, managers that hold a greater proportion of their funds in stocks and make greater efforts to time the stock market using private information about the macroeconomic announcements earn over 400 basis points higher return per year. The opposite holds for those that hold more cash. Finally, funds that more aggressively attempt to time the market using private information tend to have higher turnover and expense ratios, which are related to a greater marginal product.
Keywords: market timing, private information, macroeconomic announcement, managerial skill
JEL Classification: G14, G23
Suggested Citation: Suggested Citation