Trading behavior of institutional investors

The proposed research focuses on the trading behavior of institutional investors, and pension funds in particular. Kristy Jansen recently started a joint project with Jules van Binsbergen and Ralph Koijen about factor investing. Factor investing plays a central role in performance attribution and performance measurement. However, little is known about the overall exposure of institutional investors to these factors. In this study the goal is to determine the heterogeneity in overall factor exposures across institutional investors and how well this explains differences in returns across institutional investors. This is expected to lead to insights in how “optimal’’ investments are designed by larger institutions.

Measuring strategic factor exposures calls for monthly or quarterly data on holdings or returns at the asset class level. We use regulatory data from Dutch occupational pension plans over the period 1999-2016 (provided by DNB). Our results might have important policy implications. If factor exposures explain a non-trivial part of returns across pension funds, it might be important for pension funds to be transparent on what these exposures are and why. Pension funds could implement factor investing as integral part of a top-down strategic investment decision making.

Through DNB, Kristy has also access to holdings data of Dutch pension funds. In particular, we are interested in analyzing the effects of investment mandates on the trading behavior of the delegated asset manager of the pension fund. For instance, investment mandates often state how much credit risk the asset manager is allowed to take within the asset mandate. This has a high impact on the trading behavior of the asset managers during times of market stress this. One important question we can address with this data is whether or not institutional investors’ performance is harmed by the investment mandate, for instance as a result of forced sales.

The results will, of course, be contrasted to known results in the literature about holdings of institutional investors world-wide. The unique Dutch data is likely not to be available for other countries, but we nevertheless expect to provide an international comparison.

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