Bank-owned money managers skimpy on alpha — research paper

Money managers owned by investment banks produced less alpha than non-bank institutions from 1990 to 2008 largely due to conflicts of interest, according to an academic research paper from three university professors.

The paper analyzed mutual funds, hedge funds and institutional funds, and found that while there was no difference in performance by fund type, being owned by an investment bank reduced alpha by an average 46 basis points per year during the time period studied. That resulted in a $93 billion economic loss, or $4.9 billion a year.

The paper, “Asset Management and Investment Banking,” looked at 71 institutions — 23 banks and 48 “conglomerates” — that managed all three portfolio types for at least a year straight in the 19-year period.

“We conclude that being owned by an investment bank statistically and economically reduces the return of a portfolio,” stated the authors — Janis Berzins, associate professor of financial economics at BI Norwegian Business School; Crocker H. Liu, the Robert A. Beck professor of hospitality financial management at Cornell University's School of Hotel Administration; and Charles Trzcinka, the James and Virginia Cozad professor of finance at Indiana University's Kelley School of Business.

There were only five years — 1993-'94 and 2001-'03 — during which the benefits of being owned by a bank outweighed the costs. Over the 19 years, there was no advantage for any portfolio type, according to the paper.

“We reject the hypotheses that some contracts better align incentives, that investment flexibility leads to better returns and that those organizations with more money to spend on manager skill and information produce better returns,” the report states.

The paper concludes that the ability of investment banks to continue to extract large assets “is an important area for future research.”