Jeffrey Busse, associate professor of finance, started his professional life working at Honeywell’s Minneapolis location as an electrical engineer. But by night, he admits his real passion was tracking the stock market. “When I was an engineer, my colleagues would go home at night and build things in their basement labs,” he says. “I would go home and read the Wall Street Journal. You pretty quickly realize that you’ll never excel in your career unless you love what you’re doing, and for me that was studying the stock market.”
Busse spent three years at Honeywell before making the jump to focus on his “natural interest” in finance. He pursued an MBA in finance and then accepted a position as a financial analyst at Ford Motor Company. But after a year at Ford, Busse says he knew it was time to make one more transition and went back to school to work on his PhD and eventually on to a post at Goizueta. A move to academia was just what he needed to give him the freedom to delve more deeply into the machinations of financial markets.
Today, he focuses his research efforts on trying to determine the best ways to gauge the skills of mutual fund managers and, in turn, help the average mutual fund investor. “Before studying finance, my interest in the stock market led me to invest in mutual funds,” Busse says. “So they were my first foray into the world of investing and a topic that I’ve thought a lot about over the years.” His research takes a more sophisticated approach to tease out the variables impacting the market in order to get a clearer picture of the fund manager.
Measuring fund manager performance
One line of research deals with finding a more reliable performance measure to test a fund manager’s skill. In a research paper titled “Double Adjusted Mutual Fund Performance,” Busse and coauthors Lei Jiang 11G and Yuehua Tang control for the passive effects associated with stock holding characteristics to measure a fund manager’s performance. “It’s admittedly very hard for the average investor to assess their performance,” he says. “You need to control for the risk the fund manager takes as well as the characteristics of the holdings, and you can’t just look at returns.”
Busse’s research also challenges some interpretations of the “efficient market hypothesis.” This investment theory contends that it’s impossible for investors to consistently outperform the overall market. In the paper titled “Trading Frequency and Fund Performance,” Busse and coauthors Lin Tong, Qing Tong 10PhD, and Zhe Zhang found a strong positive relationship between trading activity and performance among institutional investors. They note, “Institutions that trade more generate greater performance, on average, as their investments earn returns that more than offset the transaction costs associated with their trades.”
Exploring transaction costs
In another vein of research, Busse identifies ways to estimate mutual fund transaction costs more accurately. His findings contradict earlier research on larger funds and how their high transaction costs weigh down performance. In a paper titled “Mutual Fund Transaction Costs,” Busse; Tarun Chordia, a chaired professor of finance; Lei Jiang 11G; and Yuehua Tang found that larger funds realize lower transaction costs than previously predicted because the “larger funds hold and trade bigger, more liquid stocks and turn over their portfolio less frequently.” However, smaller funds can “offset the cost advantages of larger funds by earning a premium on less liquid stocks.” The effects offset one another, leading to indistinguishable performance between large and small funds.
Busse views his research and that of others in the field as critical to helping investors navigate the sometimes turbulent stock market. He points to the 2008 financial crisis as a prime example of anomalies in the market and what it can teach us. “Before the crisis, many hedge funds performed well,” he says. But were the fund managers good at picking stocks or taking a lot of risk? He contends that many of them were simply exploiting the market rally. In the process, hedge fund managers were taking on too much risk, which came to bear when the market crashed. “At the end of the day, it’s all about understanding how funds generate performance,” he concludes.
Finding fulfilling work
Given his passion for finance, it’s surprising that Busse didn’t start on his current path sooner. He admits, “When I was young, I simply wasn’t exposed to careers in finance.” His knowledge of financial markets and jobs in the field came much later. But the transition from engineering to academia was an easy one, he says. “I now know the difference between working for a paycheck and what it feels like to enjoy going to work every day.”