Convergent Risk Exposures of Investment Strategies : the Case of the US Mutual Funds[La convergence de l’exposition aux risques des styles d’investissement : le cas des mutual funds américains]

We study the dynamics of risk exposures of several US mutual fund strategies over the business cycle. We extend the five factor model of Pastor and Stambaugh [2003] and following Racicot and Théoret [2016], we estimate it with variable coefficients to track the path of the risk exposures of six strategies of funds over the period 1994-2015. The results show that the market risk varies strongly over time for all strategies. While their levels were quite different before 2000, they have become more and more homogeneous since 2008. This convergence persists after being extracted from the temporal effect induced by the temporal variation of the betas of individual securities. It might emanate from the active management of portfolios at the aggregate level that could be based either on identical or similar security holdings, or on more or less similar trading models. These results imply that these strategies are not sufficiently distinct and therefore do not provide investors with effective tools to diversify their portfolios. From a macro-prudential viewpoint, this high level of convergence represents a threat to the stability of the financial system in case of fire-sales and massive deleveraging of these funds.