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Professional Portfolio Managers - A Setting for Momentum Strategies
José L. B. Fernandes, Juan Ignacio Peña, Benjamin M. Tabak and José Renato Haas Ornelas |
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Most real world market participants are professional portfolio managers (PPM)
managing money for third parties (e.g. mutual funds, pension funds). Those third parties (investors)
usually lack specialized knowledge and therefore may evaluate the PPM performance based on
his past results (Performance Based Evaluation - PBE). Under these assumptions, we develop a
limits-to-arbitrage model which considers that professional investment is conducted by a relatively
small number of highly specialized PPM using other people’s capital. In a deductive way, we reach
four propositions assessing the effectiveness of momentum strategies. Specifically we show that
in a market with PPM subject to positive (negative) PBE, returns would have positive (negative)
autocorrelation which is not inconsistent with profitable momentum-based investment strategies.
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