Research

PUBLICATIONS

• Are Subjective Expectations Formed as in Rational Expectations Models of Active Management? (with Magnus Dahlquist and Markus Ibert)
  Management Science (2026), vol. 72(8), pp. 6433-7379 

[Internet Appendix]

Abstract: We recover forward-looking expected net-of-fee abnormal returns (alphas) for active equity mutual funds from analyst ratings. In contrast to the typical equilibrium implication of zero alphas, analyst alphas are negative for most funds, but positive for the largest funds. We compare analysts’ subjective expectations with expectations from a rational expectations learning model. The model’s rational learner believes that an increase in fund size leads to a decrease in returns, but we find no evidence that analysts believe so. Consistently, counterfactual ratings based on the rational model tend to outperform analysts’ ratings out of sample. Investor fund flows respond significantly to analyst ratings.

WORKING PAPERS

• Learning about Managerial Skill and Fund Scale from Mutual Fund Analysts (2025)

Winner of the Best Paper Award at the FIRN Asset Management Meeting 2024

[Internet Appendix]

Abstract: I study analyst reports for worldwide equity mutual funds to examine two key features of active management models: investor learning and decreasing returns to scale. Flows respond to report tone over and above analyst ratings, especially for direct-sold and young funds, indicating that some investors use qualitative research when allocating capital. Report tone also predicts future abnormal returns. Using dictionary and machine learning methods, I show that analysts emphasize fund size and capacity when assets deviate from model-implied optimal levels, providing signals about under- or overcapitalization and thus positive-NPV opportunities. A composite of tone and capacity language strongly predicts returns.

• Overrated at Scale: Analyst Expectations and Capital Allocation in Active Management (with Magnus Dahlquist and Markus Ibert, 2026)

Abstract: We recover the expected net-of-fee abnormal returns (alphas) behind Morningstar analysts’ ratings of active mutual funds. Analyst alphas rise with fund size while realized alphas do not, so forecast errors fall with size: analysts are too pessimistic about the smallest funds and too optimistic about the largest, as if they underestimate decreasing returns to scale. Ratings attract flows, so the bias steers too much capital to large funds. In an estimated model of learning about managerial skill and costly investor search, correcting the bias shifts capital from large to small funds and toward passive funds, raising the value-weighted net alpha of active funds by 10 basis points, approximately 20 percent of the industry’s underperformance.

• Affiliated Intermediation in Securities Lending: Cash Collateral and the Allocation of Rents (with Richard B. Evans and Melissa Porras Prado, 2026)

Abstract: Mutual funds and exchange-traded funds (ETFs) delegate securities lending to agents affiliated with their sponsors. We show that affiliation shifts compensation away from the visible revenue split and into cash-collateral management. Combining filings with revenue disclosures, we find that affiliated funds lend more, use more cash collateral, and invest it in affiliated money funds. These vehicles offer competitive yields and gain stable funding, yet lending-fund shareholders receive lower income per dollar lent and no offset through expenses or performance. Thus, vertical integration relocates rents to a less transparent stage of the lending chain while supplying affiliated vehicles with funding.

WORK IN PROGRESS

• Trading on Index Constituent Changes: Active vs. Passive Fund Management (with Evangelos Drellias and Michael Klug)