The performance of equity funds-of-funds in Brazil: A multimethod analysis
Published:
Dec 11, 2024
Volume:
22
Keywords:
Fund of funds
FOF
Equity funds
Brazil
Abstract
This study aims to evaluate the performance of equity funds of funds (FOFs) in Brazil. First, panel regressions were used to identify the determinants of returns and value creation associated with FOFs. We then estimate the probability of FOFs outperforming mirror and master funds and their corresponding determinants. Finally, FOF indices are constructed and their performance is analyzed against the backdrop of the BOVA11 exchange-traded fund (ETF).
The results of this research indicate that the determinants of returns are aligned with the Fama-French ‒Carhart factors, all of which have positive coefficients. However, equity FOFs exhibit lower returns than other equity funds and destroy value relative to mirror and master funds. FOFs are associated with lower risks owing to diversification effects. In terms of probability, equity FOFs are not more likely to achieve superior returns than other funds. During the 2015 economic crisis in Brazil, FOFs were associated with higher probability. Finally, the FOF indices suggest profitable strategies that focus on factors such as size, growth, and liquidity.
How to cite
Ricardo Rochman, William Eid Junior. The performance of equity funds-of-funds in Brazil: A multimethod analysis. Brazilian Review of Finance, v. 22, n. 4, 2024. p. 57-94. DOI: 10.12660/rbfin.v22n4.2024.92333.
References
Acharya, V., & Pedersen, L. (2005). Asset pricing with liquidity risk. *Journal of Financial Economics, 77*(2), 375–410. https://doi.org/10.1016/j.jfineco.2004.06.007
Ang, A., Rhodes-Kropf, M., & Zhao, R. (2008). Do funds-of-funds deserve their fees-on-fees? *Working Paper 13944*, National Bureau of Economic Research. https://www.nber.org/papers/w13944
Assali, N. A. (2008). *Análise de desempenho e características de fundos de fundos multigestores do mercado brasileiro no período de setembro/1998 a agosto/2007*. Dissertação (Mestrado Profissional em Finanças e Economia), Fundação Getúlio Vargas, São Paulo.
Carhart, M. M. (1997). Market risk and expected returns. *Journal of Financial Economics, 49*(1), 3–55.
Chen, J., & Zhou, Z. (2004). Does fund size affect fund performance? Evidence from the mutual fund industry. *Journal of Business, 77*(4), 909–934.
Cotrim, F. M. (2012). *Um estudo sobre a capacidade de gestores de fundos multigestor adicionarem valor aos cotistas*. Dissertação de Mestrado em Finanças e Economia Empresarial, Escola de Pós-Graduação em Economia da Fundação Getúlio Vargas – EPGE-FGV, Rio de Janeiro, RJ, Brasil. https://hdl.handle.net/10438/13475
Cuthbertson, K., Nitzsche, D., & O'Sullivan, N. (2010). Mutual fund performance: Measurement and evidence. *Financial Markets, Institutions and Instruments, 19*(2), 95–187. https://doi.org/10.1111/j.1468-0416.2010.00156.x
Elton, E. J., Gruber, M. J., & de Souza, A. (2017). Selection of mutual funds with superior knowledge versus family and management goals. *Technical report*, SSRN. https://ssrn.com/abstract=2945662
Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. *Journal of Financial Economics, 33*(1), 3–56. https://doi.org/10.1016/0304-405x(93)90023-5
Fonseca, L. N. C. (2012). *Análise de desempenho dos fundos multimercados*. Dissertação de Mestrado, FEA USP. https://doi.org/10.11606/D.12.2012.tde-26072012-154011
Fung, W., Hsieh, D. A., Naik, N. Y., & Ramadorai, T. (2008). Hedge funds: Performance, risk, and capital formation. *The Journal of Finance, 63*(4), 1777–1803. https://doi.org/10.1111/j.1540-6261.2008.01374.x
Gowri, M., & Deo, M. (2018). Value addition through fund of funds (FOFs): A comparison between FOFs and individual mutual funds in India. *IUP Journal of Management Research, 17*(2), 7–23.
IIFA. (2023). Industry statistics. Retrieved from https://iifa.ca/page/industry_statistics. Accessed in December 2023.
Sharpe, W. F. (1966). Mutual fund performance. *Journal of Business*, 119–138. https://doi.org/10.1086/294846
Treynor, J., & Mazuy, K. (1966). Can mutual funds outguess the market? *Harvard Business Review, 44*, 131–136.