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Cautious Risk Takers: Investor Preferences and Demand for Active Management

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  • VALERY POLKOVNICHENKO
  • KELSEY D. WEI
  • FENG ZHAO

Abstract

Despite their mediocre mean performance, actively managed mutual funds are distinct from passive funds in their return distributions. Active value funds better hedge downside risk, while active growth funds better capture upside potential. Since such performance features may appeal to investors with tail‐overweighting preferences, we show that preferences for downside protection and upside potential estimated from the empirical pricing kernel can help explain active fund flows in the value and growth categories, respectively. This effect of investor risk preferences varies significantly with funds' downside‐hedging and upside‐capturing ability, with levels of active management, and across retirement and retail funds.

Suggested Citation

  • Valery Polkovnichenko & Kelsey D. Wei & Feng Zhao, 2019. "Cautious Risk Takers: Investor Preferences and Demand for Active Management," Journal of Finance, American Finance Association, vol. 74(2), pages 1025-1075, April.
    • Handle: RePEc:bla:jfinan:v:74:y:2019:i:2:p:1025-1075
    DOI: 10.1111/jofi.12747
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    Cited by:

    1. Immo Stadtmüller & Benjamin R. Auer & Frank Schuhmacher, 2024. "Core-satellite investing with commodity futures momentum," Journal of Asset Management, Palgrave Macmillan, vol. 25(3), pages 261-287, May.
    2. Auer, Benjamin R. & Marohn, Marcel, 2024. "Computational dynamics of information ratios," Economics Letters, Elsevier, vol. 236(C).
    3. Christoph Frei & Liam Welsh, 2022. "How the Closure of a U.S. Tax Loophole May Affect Investor Portfolios," JRFM, MDPI, vol. 15(5), pages 1-10, May.
    4. Gupta, Nilesh & Mishra, Anil V & Jacob, Joshy, 2022. "Prospect theory preferences and global mutual fund flows," Journal of International Money and Finance, Elsevier, vol. 125(C).
    5. Leonard Kostovetsky & Jerold B. Warner, 2020. "Measuring Innovation and Product Differentiation: Evidence from Mutual Funds," Journal of Finance, American Finance Association, vol. 75(2), pages 779-823, April.
    6. Gu, Ariel & Yoo, Hong Il, 2021. "Prospect Theory and Mutual Fund Flows," Economics Letters, Elsevier, vol. 201(C).

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