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Holding Horizon: A New Measure of Active Investment Management

Published online by Cambridge University Press:  10 March 2023

Chunhua Lan ,
Fabio Moneta  and
Russ Wermers
Chunhua Lan
Affiliation:
University of New Brunswick Faculty of Management clan@unb.ca
Fabio Moneta
Affiliation:
University of Ottawa Telfer School of Management fmoneta@uottawa.ca
Russ Wermers
Affiliation:
University of Maryland at College Park Smith School of Business wermers@umd.edu
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Abstract

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This article introduces a new holding horizon measure of active management and examines its relation to future risk-adjusted fund performance (alpha). Our measure reveals a wide cross-sectional dispersion in mutual fund investment horizons, and shows that long-horizon funds exhibit positive future long-term alphas by holding stocks with superior long-term fundamentals. Further, stocks largely held by long-horizon funds outperform stocks largely held by short-horizon funds by more than $ 3\% $ annually, adjusted for risk, over the following 5-year period. We also find a clientele effect: to reduce liquidity costs, long-horizon funds attract more long-term investors through share classes that carry load fees.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 45
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are grateful to George Aragon, Pierluigi Balduzzi, Hendrik Bessembinder (the editor), Michael Cooper (the referee), Wayne Ferson, Jean-Sebastien Fontaine, Wei Jiang, Pete Kyle, Saurin Patel, Jeff Pontiff, Veronika Pool, Ronnie Sadka, Pauline Shum, Laura Starks, Noah Stoffman, Selim Topaloglu, Wei Wang, Chishen Wei, Zhijie Xiao, Tong Yao, and seminar participants at the UCLA Anderson Finance Conference in Honor of Mark Grinblatt (June 2018), 2018 Asian Finance Association Annual Conference, 2015 American Finance Association, 2015 China International Conference in Finance (CICF), 2015 NFA meetings, 2018 GSU CEAR-Finance conference, 2015 Berlin Asset Management conference, Bank of Canada, LTI@UniTO Webinar, Shanghai Advanced Institute of Finance, University of Illinois at Chicago, University of Maryland at College Park, University of Ottawa, and University of Queensland for their insightful comments.

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