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.
This article originally appeared in the March 4, 2013 print issue as, "Bank-owned managers a little skimpy on alpha".