Research On Drivers And Constraints Of Chinese Fund Managers’ Risk-taking Behaviors

Securities investment funds as important institutional investors have been given high hopes by the government’s securities regulator in China to achieve the supernormal development of reducing stock market volatility and stabilizing the market. However, from the point of China’s securities investment fund management practices, the equity securities investment funds in China have high risk, and the securities investment funds have not reached good expectation to stabilize the financial market. Due to the fund manager’s investment behaviour is essentially a proxy investment financial services provided for fund investors, fund managers tend to choose risky assets in the investment driven by fund manager’s limited liability and the principal-agent asymmetric risk-return characteristic. The investment risk behaviours may not only damage the interests of fund investors, but also lead to financial asset prices systemic deviation from the intrinsic value, which increased the volatility in financial markets and stoked the financial bubble further. The study of fund managers’ risk-taking behaviors, helps to exert better function of stabilizing the market for institutional investors, improve the regulatory mechanism of China’s securities investment fund, guide and regulate the fund manager’s investment behavior.Different from general principal-agent relationship, the fund manager’s efforts and the fund risk levels are endogenous variables which can be controlled and chosen by fund managers. Fund managers when performing investment decisions may deviate from its proxy investment "risk management" intention as the institutional investors, and tend to implement certain risk-taking behaviors in the investment practice for the purpose of maximizing their own compensation. In this paper, closely combined with the special background of China’s securities investment fund market, the fund managers’ risk-taking behaviors in China are studied, which based the integrated use of financial economics, behavioral finance, asset pricing and risk management theory, using standard econometric analysis of financial markets. I defined fund managers’ risk-taking behaviors as the conditions in which the fund risk chosen by fund managers beyond the risk of the performance benchmark. The paper studied evaluation of fund managers’ risk-taking behaviors, driveling factors of fund managers’ risk-taking behaviors and constraints mechanism of fund managers’ risk-taking behaviors. In the end, the corresponding countermeasure suggests have been given to prevent and control fund managers’ risk-taking behaviors.The main research content of this paper specifically includes the following three aspects:(i) Evaluation of fund managers’ risk-taking behaviors. This paper studies the results of multiple ways for fund managers’ risk-taking behaviors, and evaluates the risk-takingbehaviors respectivelybased on the angle of fund managers and fund investors. Based on China’s mutual fund market in 2004-2012 using an unbalanced panel data of 36 quarter, I show that fund managers’ risk-taking behaviors in China generally do not promote fund investorswelfare, which is considereda more certain "moral hazard" rather than "information superiority" behaviors of fund managers. Further, I find the fund managers’ risk-taking behaviorsinfluence of the return of fund managers and fund investors is different when fund manager take risk by adjusting risk assets ratio, systemic risk and idiosyncratic riskthree different ways.Fund managers’ risk-taking behaviors, by the way of adjusting the fund idiosyncratic risk, reduce the fund managers’ returns but are beneficial to improve the welfare of the fund investors. But for the system risk adjustment, fund managers’ risk-taking behaviors increase the fund manager returns and cause a loss of fund investors’ welfare.(ii) Drivers of fund managers’ risk-taking behaviors. On the basis of combing the main factors that influence fund risk level, this paper respectively based on two different angles of fund managers compensation contracts and fund investors risk appetite, studies the main driving factorsof fund managers’ risk-taking behaviors. By constructing the discrete and continuousoptimalselection model of fund risk, on the one hand, we show that the main factors drivingfund managers’ risk-taking behaviors for symmetrical structure compensation contract are fund managers’ subjective judgment of the situation and their risk preference, regardless of the strength of the fund managers’ compensation contract. In particular, when fund managers believe that the possibility of their fund’s performance beyond the benchmark is small and the possibility of "loss" in the end of the year is big, fund managers’ risk-takingbehaviors will occur more likely. When managers’ compensation contract change from symmetrical structure to asymmetric structure, asymmetric compensation contract is more likely to lead to fund managers’ risk-taking behaviorsif the fund manager has a decreasing absolute risk aversion(DARA) preference. Constructing a rational investors expected analytical model and combining with mutual funds empirical analysis using an unbalanced panel-data in China, On the other hand, we study how performance volatility affects flows to mutual funds. We find that mutual fund flows are not negatively related with fund performance volatility as we had expected, but the negative correlation between flow-performance sensitivity and fund performance volatility exists. We provide supporting evidence for Chinese investors having "a limited chasing" attitude on fund risk, which objectively constitutes the implicit incentive of modest fund managers’ risk-taking behaviors but significantly discourages excessive managers’ risk-taking behaviors.(iii) Constraints of fund managers’ risk-taking behaviors. Based on the idea of "weaken the drivers of fund managers’ moral hazard behaviors ", we examine the effects of fund investors "voting with their feet" and fund managers "self-purchase" two fund managers’ risk-taking behaviorsconstraint mechanism under implicit and explicitfund managers’ risk-taking behaviorsdriving factors. Constraints from fund investorsaremainly from the structural characteristics of fund flow to find the effects of market power of fund investors "voting with their feet". Constraint from fund policy, as a example of fund managers "self-purchase", have been introduced to examine whether really do help build better risk-sharing mechanism between fund managers and fund investors. In short, the fund managers’ risk-taking behaviors constraint way of market-orientedfund investors "vote with their feet" is to be further improved and the way of policy-oriented fund managers "self-purchase" shows a better constraint effect.