A Research On Risk-Shifting Of China’s Open-ended Funds And Its Influence On The Funds’ Performance

Fund is the inevitable result of the securities market development, which has existed in the developed countries for hundreds of years, and has developed in China for more than twenty years. Looking back the fund development history of our country in the past over20years, it roughly passed three stages:The early stage of the exploration, the development stage of the experimental unit, and the rapid development stage. However, there are also many problems while the securities investment fund highly develops. Therefore, the operation action of the funds must be standardized, in which the key points is to do research on the problems like the fund risk and its performance etc.Fund change the risk level over time. The performance of fund after risk shifting has a great relationship with economic motivation behind the risk shifting. Therefore, it is necessary to study the fund performance after the fund risk shifting behavior, in order to understand the risk shifting effect on investors.Ippolito (1992), Chevalier and Ellison (1997) have identified a convex and positive flow-performance relation (FPR), in which the fund managers have implicit incentives to strategically change funds’risk levels to increase the expected money inflows or to manipulate their performance numbers. Many literatures indicate this kind of risk shifting well reduce the funds’performance, and is harmful to investors (For example, Brown, Harlow and Starks (1996) and Goetzmann, Ingersoll, Spiegel and Welch (2007)). But risk shifting may not be harmful. Huang, Sialm and Zhang (2010) indicate that fund managers compete with each other for the increase of money inflows of the fund, and this kind of risk shifting isn’t harmful to investors. Ippolito (1989) indicate that fund managers might shift risk to take advantage of their excellent abilities, and this kind of risk shifting may be good to investors.Although many previous literatures research the risk shifting motivation of fund manager, few people study the risk shifting is signal of high investment capacity or signal of wrong investment motivation.This paper studies the risk shifting of China’s open-ended funds, its influence on the funds’ performance, and its mechanisms and motivations.This paper includes six chapters. The first chapter is the introduction. This part introduces the background, meaning, contend, and innovation. The second chapter is review of literatures. This part discusses the related research literature from the fund performance measure, risk shifting measure, risk shifting motivation and its influencing factors. The third chapter is models and data. This part is separated into three sections:6risk shifting measures of six kinds of risk and5fund performance measures, a two-step multivariate regression model basis on Fama-Macbeth method, and index, sample and data. The forth chapter is the research on the influence of risk shifting. This part is separated into five sections: characteristics of fund after risk shifting, performance results of risk shifting, persistence of risk shifting, multivariate regression model and chapter summary. The fifth chapter is the research on the mechanisms and motivations of risk shifting. This part is separated into four sections:initial analysis, mechanisms of risk shifting, motivations of risk shifting, and chapter summary. The sixth chapter summaries the hole paper, gives investor suggestions, and points out some further researches.It drew the following conclusions from the research of this paper:1. The risk shifting would lower down the fund performance, and the increase of the risk level would take more remarkable negative effect on the fund performance. So the risk shifting was the false trading motive and the signal of the low capacity by the fund manager.2. The risk shifting was the leading indicator of the fund performance, and it could predict the inferior fund performance.3. The main mechanism to shift risk was to increase the benchmark deviation standard, and the risk caused by the stock holding as well as the non-systematic risk, the other way was to reduce the cash proportion and increase the systematic risk.4. The fund with the high expense ratio, short age, small size and low performance in the last year was more inclined to make risk shifting, and highly sensitive to the low performance by the risk shifting; the trading costs were not the cause of the low performance by the risk shifting.In general, the innovation of the paper embodied as the following aspects: Firstly, there was no domestic research on the risk shifting influence on the fund performance. Therefore, the risk shifting effect on the fund performance was studied in the paper for the first time. Secondly, the paper adopted the difference of the current holdings volatility and past realized volatility as the measurement indicator of the risk shifting, and the method was more correct to reflect the fund to change the risk level than the traditional measurement method. In addition, the paper adopted the risk shifting measurement for the multi-risks. Finally, the paper begun from the research requirement and established the two-step multibariate regression model on the basis of the Fama-Macbeth regression method.