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Research Papers

Our experts have published extensively in peer-reviewed journals. Pre-publication versions of these papers plus other working papers are available below.

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The Fall of Willow

By: Geng Deng and Craig McCann

From May 8, 2000 until June 30, 2007, the UBS Willow Fund was invested in distressed obligations with offsetting but smaller cash and synthetic short debt positions through credit default swaps (CDS). After June 2007 the Fund dramatically increased its purchases of CDS and became massively short distressed debt. Investors in the Fund lost $278.4 million during this second period from June 2007 to December 2012 and the Willow Fund was liquidated in 2013.

The Willow Fund understated the risk...

Oppenheimer Champion Income Fund

By: Geng Deng and Craig McCann

During the second half of 2008, Oppenheimer's Champion Income Fund lost 80% of its value - more than any other mutual fund in Morningstar's high-yield bond fund category. These extraordinary losses were due to the Fund's investments in credit default swaps (CDS) and total return swaps (TRS). The Fund used CDS and TRS to leverage up the Fund's exposure to corporate debt and asset-backed securities, including Mortgage-Backed Securities and swap contracts linked to Residential and Commercial...

What Does a Mutual Fund's Term Tell Investors?

By: Geng Deng, Craig McCann, and Edward O'Neal

In a previous article, we highlighted a flaw in the average credit quality statistic frequently reported by bond mutual funds. That statistic understates the credit risk in bond portfolios if the portfolios contain bonds of disperse credit ratings. In this article we address a similar problem with bond mutual funds' reporting of the average term of their portfolios. The somewhat ambiguous nature of this statistic provides an opportunity for portfolio managers to significantly increase the...

What Does a Mutual Fund's Average Credit Quality Tell Investors?

By: Geng Deng, Craig McCann, and Edward O'Neal

The SLCG study explains that the Average Credit Quality statistic as typically calculated by the mutual fund companies and by Morningstar significantly overstates bond mutual funds' true credit quality. This statistic is based on Standard & Poor's and Moody's assessment of the credit risk of the individual bonds in the portfolio and is reported to mutual fund investors using the familiar letter scale for rating the credit risk of bonds.

The study concludes that, for instance, funds that...

Charles Schwab YieldPlus Risk

By: Geng Deng, Edward O'Neal, and Craig McCann

From June 2007 through June 2008, investors in YieldPlus (SWYSX and SWYPX) lost 31.7% when other ultra short bond funds had little or no losses. Schwab had marketed YieldPlus as a low risk, higher yielding alternative to money market funds.

The report concludes that YieldPlus's extraordinary losses occurred because the fund held much larger amounts of securities backed by private-label mortgages than other ultra short bond funds. In doing so, Schwab's fund violated concentration and...

Regions Morgan Keegan: The Abuse of Structured Finance

By: Craig McCann

Investors in six Regions Morgan Keegan (RMK) bond funds lost $2 billion in 2007. The RMK funds held concentrated holdings of low-priority tranches in structured finance deals backed by risky debt. We provide five examples of the asset-backed securities RMK invested in: IndyMac 2005-C, Kodiak CDO 2006-I, Webster CDO I, Preferred Term Securities XXIII, and Eirles Two Ltd 263.

RMK did not disclose the risks it was taking until after the losses had occurred. In fact, RMK misrepresented hundreds...

Closed-end Fund IPOs

By: Edward O'Neal

Dr. O'Neal describes a pattern of consistent losses relative to NAV observed after the IPO of closed end funds. Closed-end funds IPO at a 5% premium to their NAVs and within 6 months trade at a 5% discount to their NAVs. It appears that investing in a closed-end fund at the IPO is dominated by investments in seasoned mutual funds. This suggests that closed-end fund IPOs don't pass the NASD's 'reasonable basis' suitability test and recommendations to buy a closed-end fund at the IPO should...

Mutual Fund Share Classes and Conflicts of Interest between Brokers and Investors

By: Edward O'Neal

Dr. O'Neal describes the various mutual fund share classes and explains how differences in commissions to brokers and costs to investors across share classes can create conflicts of interests.

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