Firing a Fund Manager: Examining termination strategies using multi-regime simulation

Abstract

This paper explores different portfolio strategies to determine what the best strategies are to firing an active fund manager for a portfolio of actively managed funds. Following this, this paper also addresses whether using these policies add value in comparison to a Buy and Hold strategy. Using data available on commercial databases regarding active fund manager returns over the course of the past 15 years, this paper firstly examines historical returns to identify trends and characteristics such as mean reversion, performance persistence and different risk measures. The second part consists of a simulation of active fund returns and investor decisions based on historical returns using a multi regime simulation. The simulation is such that at each time period the Fund of Funds manager can choose to retain or fire (at a certain cost) the active fund manager based on their performance. While only a few of the strategies showed signs of being able to offer return generation, most of them showed the ability to minimize volatility and worst case losses.