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RFS Advance Access published online on October 25, 2006
Review of Financial Studies, doi:10.1093/rfs/hhl041
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Copyright © The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies.

Article

Unobserved Actions of Mutual Funds

Marcin Kacperczyk 1, Clemens Sialm 2 *, and Lu Zheng 3
1 University of British Columbia
2 Stephen M. Ross School of Business, University of Michigan, 701 Tappan Street, Ann Arbor, MI 48109-1234 and NBER
3 University of California, Irvine

* To whom correspondence should be addressed.
Clemens Sialm, E-mail: sialm{at}umich.edu


  Abstract
Despite extensive disclosure requirements, mutual fund investors do not observe all actions of fund managers. We estimate the impact of unobserved actions on fund returns using the return gap - the difference between the reported fund return and the return on a portfolio that invests in the previously disclosed fund holdings. We document that unobserved actions of some funds persistently create value, while such actions of other funds destroy value. Our main result shows that the return gap predicts fund performance.

We thank Klaas Baks, Jonathan Berk, Sreedhar Bharath, Susan Christoffersen, Elroy Dimson, Roger Edelen, Katrina Ellis, Richard Evans, William Goetzmann, Jennifer Huang, Roger Ibbotson, Jackie King, Massimo Massa, M.P. Narayanan, Lubos Pástor, Antti Petajisto, Jonathan Reuter, Pablo Ruiz-Verdu, Jacob Sagi, Matthew Spiegel (the editor), Steven Todd, Li Wei, Ruhui Yang, Ning Zhu, Eric Zitzewitz, two anonymous referees, and seminar participants at Barclays Global Investors, Hong Kong University of Science and Technology, INSEAD, Northwestern University, University of Binghamton, University of British Columbia, University of California at Irvine, University of Carlos III de Madrid, University of Lausanne, University of Michigan, University of Zurich, Yale School of Management, the 2005 University of California at Davis Conference on Valuation in Financial Markets, the 2005 China International Conference in Finance, the 2005 European Finance Association Meetings, the 2005 International Conference on Delegated Portfolio Management and Investor Behavior, the 2005 Conference on Financial Economics and Accounting at the University of North Carolina, the 2005 Financial Research Association Conference, the 2006 Utah Winter Finance Conference, and the 2006 Western Finance Association Conference for helpful comments and suggestions. We acknowledge financial support from Mitsui Life Center and Inquire Europe. Kacperczyk acknowledges research support from the Social Sciences and Humanities Research Council of Canada.


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