The Case for Active Trading | Chief Investment Officer

More frequent trading could boost returns—at least for the right fund size.

Although research has shown that high-frequency trading detracts from retail investor performance, some institutional investors actually outperform as a result of active trading, according to finance professors Jeffrey Busse (Emory University), Lin Tong (Fordham University), Qing Tong, and Zhe Zhang (Singapore Management University).

“Skillful trade execution can enhance an investment fund’s return relative to the competition,” they wrote. “Active trading has the potential to generate alpha if it can take advantage of opportunities in the securities markets.”

But lack of skill, the authors warned, could result in “excessive transaction costs and lagging performance. Only traders with skill can afford to bear the transaction costs associated with active trading.”

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For the study, the researchers examined the performance, transaction costs, and trading frequency of asset managers and asset owners from 1999 to 2009 using data from trading cost analyst Ancerno.

Frequent trading among institutional investors, they found, was tied to higher risk-adjusted returns net of transaction costs: The highest-frequency traders outperformed the most static group by 0.73%.

However, this gap narrowed as funds grew larger and generated higher transaction costs.

“Given that larger funds trade larger orders, they are susceptible to greater price impact from their trades,” the researchers explained. “Larger funds consequently realize lower net returns when they attempt to exploit short-term trading opportunities.”

Perhaps due to these higher costs, Busse, Tong, Tong, and Zhang found that larger funds exhibited lower trading frequency than their smaller peers.

“While it is difficult to argue with the idea that expenses should be minimized,” they concluded, “our evidence suggests that more expensive strategies can sometimes dominate, insofar as the most active institutional traders persistently produce positive abnormal returns.”

Read the full report, “Trading Frequency and Fund Performance.”

SMU CIO Rakesh Dahiya Rakesh DahiyaSouthern Methodist University (SMU) has appointed Rakesh Dahiya as treasurer and CIO, the university announced Wednesday.

Dahiya, who previously oversaw hedge funds, public equity, and fixed-income strategies at the University of Florida Investment Corporation, will take charge of SMU’s $1.5 billion endowment on September 12.

“Rakesh Dahiya’s experience in higher education investment management, particularly with sophisticated institutional portfolios much like SMU’s, as well as his achievements in corporate finance, makes him an excellent fit as SMU’s chief investment officer,” said SMU President Gerald Turner in a release.

Dahiya replaces ex-CIO Michael Condon, who resigned earlier this year to join the Fund Evaluation Group’s outsourced-CIO (OCIO) arm.

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At SMU, Dahiya will work with the board of trustees’ investment committee on “setting agendas, developing policies, [and] formulating investment strategies, as well as recommending specific investment managers and vehicles for carrying out the investment program,” the university said.

“Current markets are complex and fast-moving,” said Fred Hegi, chair of the investment committee. “It was important that we find the best individual to monitor national and global markets and identify strategic opportunities that position the university for growth.”

Prior to his five years with the University of Florida endowment manager, Dahiya served nine years as a public markets manager at Washington University. He also worked as an investment manager at the Ralston Purina Company.

Dahiya holds an MBA from the University of Illinois.