What is it about?
This theoretical study examines whether funds managers' intrinsic ability can differ from their risk tolerance. Formal predictions reveal this indeed is the case, that is, risk tolerance and intrinsic ability can be dichotomous characteristics of funds managers. Regardless of dichotomy between risk tolerance and ability, structure of fund returns generated by ability or risk tolerance can coincide resulting in returns that are positively skewed U-shaped functions of either of ability or risk tolerance.
Why is it important?
Formal proofs demonstrate that the conventional "invest in positive alpha funds" investment advice can yield lower returns than a strategy that invests in zero or negative alpha funds. Study demonstrates superiority of positive alpha strategies is not independent of current structure of returns within fund markets.
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This page is a summary of: Funds Managers' Risk Tolerance vis-a-vis Ability: Market Structure Implications, SSRN Electronic Journal, January 2017, Elsevier,
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