tailieunhanh - Portfolio Transactions Costs at U.S. Equity Mutual Funds*

The analysis in this paper suggests that hedge funds play a very positive role in financial markets by providing liquidity to thin markets where mis-priced financial instruments are to be found. This type of activity reduces volatility rather than increasing it. Indeed with the rapid growth of structured products in recent years, particularly in Europe and Asia, hedge funds have been quite critical in containing the volatility that might otherwise have arisen. Structured products are largely driven by investment banks, and have resulted in the proliferation of new and highly-complex derivative products (discussed below). Figure 1 shows. | Portfolio Transactions Costs at . Equity Mutual Funds Jason Karceski University of Florida . Box 117168 Gainesville Florida 32611-7168 352-846-1059 Miles Livingston University of Florida . Box 117168 Gainesville Florida 32611-7168 352-392-4316 Edward S. O Neal Babcock Graduate School of Management Wake Forest University PO Box 7659 Winston-Salem NC 27109-7659 Phone 336 758-4976 Abstract We study the trading costs for a large sample of equity mutual funds. Using the actual brokerage commissions paid in 2002 and estimating the implicit trading costs we find that fund investors bear substantial portfolio trading costs. Equity funds incur an average annual explicit brokerage commission of 38 basis points and an average annual implicit trading cost of 58 basis points. When measured separately for different mutual fund styles these costs are highest for small cap funds and lowest for large cap funds. About 46 of all small cap mutual funds have trading costs that are higher than the annual fees investors pay. We suspect that many mutual fund investors are completely unaware of these trading costs and simply assume that the reported expense ratio includes them. Our findings suggest that greater attention to trading costs might help investors make more informed mutual fund investment decisions and that greater disclosure of trading costs might benefit investors. This research was funded by the Zero Alpha Group ZAG 1 Portfolio Transactions Costs at US Equity Mutual Funds The costs of investing in mutual funds are not limited to the explicit annual charges that are aggregated into mutual fund expense ratios. Portfolio trading that is directed by the fund s advisor gives rise to explicit and implicit transactions costs which can in some cases be higher than the published expense ratio. Information about annual expense ratios is readily available. The costs of trading however are not nearly