Abstract
In the first chapter, we define benchmark drift based on changes in a fund's beta relative to its self-promoted benchmark, calculated from the portfolio holdings of both the fund and benchmark. Benchmark drift has a strong adverse impact on mutual fund flows, even when funds beat the benchmark. Moreover, controlling benchmark drift plays a larger role in portfolio risk management than tournament-style behavior. Both external and internal governance mechanisms work to control benchmark drift: funds with greater institutional investment and those in larger fund families demonstrate less benchmark drift and take stronger steps to reduce it once it occurs. In the second chapter, I study Alternative mutual funds (AMFs). AMFs are a rapidly-growing class of funds that offer hedge-fund-like strategies to investors. Since the 2008 financial crisis, AMFs have accumulated more net flows than non-alternative, actively-managed equity mutual funds. I examine the flow-return relationship for AMFs and, unlike the prior literature documented for equity mutual funds, I find a strong, asymmetric flow-return relationship in which investors react more strongly to losses than gains. I attribute this finding to AMFs attracting investors highly sensitive to losses in the wake of the 2008 crisis. Consistent with this hypothesis, the asymmetric flow-return relationship for AMFs is stronger after the 2008 crisis, and in funds with more conservative investment mandates. These results raise the concern that redemption-based liquidity shocks in AMFs could destabilize financial markets. In the third chapter, we study "style investing'' by portfolio managers of style-orientated actively-managed mutual funds, to document the stock-level characteristics that determine security selection. Both growth and value managers favor stocks included in style-specific Russell indices. In addition, although growth (value) fund managers prefer stocks with high (low) valuation ratios as expected, growth (value) fund managers also prefer stocks with less (more) labor intensive operations. Compared to value fund managers, growth fund managers invest in companies with higher liquidity and lower debt levels - consistent with a risk-based explanation of the value premium.