dissertation 2012

T H E I M P A C T O F T H E D O D D F R A N K A C T
O N M U T U A L F U N D P E R F OR M A N C E S
A 10-Year Fund Analysis
Moza Al-Roumi
2012

2
D E C L A R A T I O N
I declare that all materials and sources of information that were used in my work
have been acknowledged and that this dissertation is of my own work and
assumptions. I have kept all materials used in this dissertation and can be produced
on request.

Al-Roumi, Dissertation 2012
3
A C K N O W L E D G E M E N T S
I would like to express my extreme gratitude for Professor Giampiero Favato for his
time and efforts throughout my dissertation and insightful feed back. I would like to
specifically thank my father Ambassador Mohammed Al-Roumi, my mother Nadia
Al-Mojil and my fiancée Rakan Al-Fadalah for reinforcing me with positivity and
support. Last but not least, I would like to thank the rest of my family and friends for
their constant motivation through out this research as their patients and
understanding have fueled and inspired me.

4
T A B L E O F C O N T E N T S
The Dodd Frank Act 6
Abstract 6
Introduction 8
Aim, Objectives and Hypothesis 10
Literature Review 11
Methodology 18
Data Collection Method and Types of Data 19
Data Analytical Tool 20
“The Act” Relevant Provisions 21
Financial Stability Oversight Council 21
Federal Reserve Board 21
Private Fund Investment Advisers Registration Act of 2010 21
The Volcker Rule 22
Wall Street Transparency and Accountability 22
Regulation of Swap Markets 23
Investor Protections and Improvements to the Regulation of Securities 24
Accountability and Executive Compensation 24
Results 25
Mutual Funds Screened 25
Fund Analysis Period 1 (30/12/02-30/12/2007) 30
Fund Analysis Period 2 (01/01/2008-30/12/2011) 32

5
Fund Analysis (data range 30/12/2002-30/12/2011) 33
Tracking Indicators (data range 28/06/2002-31/05/2012) 34
Discussion 39
Regulation or Deregulation? 39
Major New Regulators 40
The Case Against the Dodd-Frank Act 41
Risk Versus Return Payoff 42
Systematic Risk Impact on Fund Performances 42
Impact of the Act on Fund Managers and Investors 43
Conclusion 45
Bibliography 48

6

T H E D O D D F R A N K A C T
Dodd-Frank Wall Street Reform and Consumer Protection Act
(incorporates the Volcker rule)
Abstract
The focus of this research is the analysis of the regulatory influence on performances
and how it attributes to Mutual Fund trading constraints and profit-maximizing
opportunities. The aftermaths of the 2007 financial crisis have restructured the
investment environment and adapted a new landscape on which Funds need to
adhere and operate under. The research approach adopted includes an archival
methodology for retrieving historical market prices, which is then integrated with
descriptive statistics to give a visual of pre and post crisis performances and
volatility levels. Theoretical methodology is then regarded for value comparison and
the applied regulatory trade constraints at hand. The definition of The Dodd-Frank
Act is to adopt and maintain financial stability and transparency throughout the
financial sector of the United States. Therefore, any regarded risk and exploitation of
previous ease in Fund registration and trading activity has been immensely altered.
The research addresses the roots in the conflicts of interest and the related threats
attributed by the abusive and accumulated systematic risk adhered to by excessive
derivative usage, and the intoxicated leverage levels accumulated. The derived
findings provide evidence of the constraints set forth by the Dodd-Frank Act in terms
of restrictions in dynamic strategies that were once taken advantage of in a market
inefficiency form, which have thus highly impacted Fund performances.
A ten year analysis period was divided into two sections, the first period 30/12/2002-
30/12/2007 gives an overview of the startup of the Funds prior to the 2007 crisis, the
second period 01/01/2008-30/12/2011 sets the view on post crisis and regulatory
impact on Fund performances. A total of sixteen Funds were screened according to
the criteria needed which were actively traded Funds of $150 million or above in
assets under management and were trading in the United States. The main
conclusions derived from my research is during period one (post crisis and regulation
reform) in which 56% of the Funds had negative returns while the remaining 44% of
Funds calculated an average or slightly above average returns. During the second
period (the pre crisis and regulation reform), 18.7% of the Funds had positive returns

7

while 81.25% of the Funds experienced negative returns. Taking into consideration
the total duration of both periods, (30/12/2002-30/12/2011), 62.5% of the Funds
achieved above average returns. Concluding our research with the observed fact that
even though regulation does impact Funds short term performances, in the long term
it is a diminutive measure with other factors such as volatility levels and the market
environment to consider in the equation. In the ten year analysis total period of
28/06/2002-31/05/2012, 43.75% of the Funds out performed the index in a Bull
market, 68.75% of the Funds out performed the index in a Bear market. The analysis
has shown a correlation between the Funds Beta and Tracking Error where 75% of
the Funds move closely with the index, while 35% have lower correlation to index as
well as higher systematic risk. Concluding my research with the results that
regulation does not solely influence the Funds total return.
Key words: Mutual Fund, Regulation, Derivatives, and Performance.

8

I N T R O D U C T I O N
The 2007/2008 world financial crisis startled the financial world, bewildering
societies view on the financial sector and its true implications. A vast majority of the
world was extremely affected by the over leveraging and escalated, uncontrollable
risk factors that consumed the world’s markets and investments. As Confucius once
said, “Success depends upon previous preparation, and without such preparation
there is sure to be failure”1
What the world and regulators did not do is thoroughly
prepare the loopholes of previous regulations prior to the Dodd-Frank Act 2
.
In July 21, 2010 the Act was signed by President Barack Obama. The Acts full title3
states the key trigger areas of financial distress as, “An Act to promote the financial
stability of the United States by improving accountability and transparency in the
financial system, to end "Too Big to Fail", to protect the American taxpayer by
ending bailouts, to protect consumers from abusive financial services practices, and
for other purposes4
”. The Dodd Frank Act will here on be referred to as “The Act”.
Throughout the Act, a constant repetition of the core variables at hand articulated the
key concern factors that lead up to such vigorous constraints. The recurring aspect
(change) that the Act deems are any activities or transactions that would cause a
threat to the financial and banking system of the United States (Fein, M. 2010).
Preceding “The Act”, investment advisors who had less than 15 clients in the
recurring 12 months were not obligated to register with the SEC5
. Nor where they
required to publicly disclose their advisory roles. “The Act” has terminated this past
exemption, therefore providing investment advisors, hedge Funds, and private equity
firms to subjective new requirements (Rooney, A. 2012).
The campaign against “Too Big to Fail” and the catastrophic financial losses the US
government incurred during the bailouts of numerous “big” institutions shed light to
a very important provision in “the Act”, which is known as the Volcker Rule. Named
after the Federal Reserve chairman Paul Volcker (En.wikipedia.org 2007), the
provision prohibits banks from proprietary trading, in turn, decreasing systematic
1
Brainyquote.com (2001)
2
Wilmarth,A (2009)
3
Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)
4
Gpo.gov (2010)
5
US Securities and Exchange Commission

9

risk6
. Under Title X of “the Act” the new authority, ‘Consumer Financial Protection
Bureau’ is set up to attempt and safe guard consumers from unfair, misleading and
abusive financial practices (The Act 2010). Governor Elizabeth A. Duke stressed the
need for regulatory reform as she emphasized that the abusive lending practices that
occurred unnamable, posed a threat to the stability of the markets as well as aided in
the decrease in consumer protection.7
Value at Risk is one of the most popular market risk measures that have consumed
the financial industry since the crisis. VAR8
measures the probability to interpret risk
exposures as a potential loss, and thereafter, summarizes the maximum expected loss
over a targeted horizon (Rogers, J. 2002). The controversy surrounding VAR9
as
argued by Pablo Triana (2012) stems from the fact that the model can critically
underestimated risk. The underestimation is derived from the fact that VAR is
calculated by looking at historical prices, neglecting a forward looking perspective,
therefore, proving the absence in underlying risk which affects present predictions 10
.
The reliance of such tools as the Value at Risk and others have caused disturbance in
the core belief in the ability of analysts and fellow financiers, to pin point the actual
risk at hand, sending a shock wave of uncertainty and distrust across the sector.
“The Act” articulates two main objectives, first, the limitation of risk under
contemporary finance, which basically requires Hedge Funds to be registered for the
first time, hence ending the opaqueness that has consumed the sector. Second, is to
limit the damage incurred by the fall of large financial institutions that would disrupt
the United States’s financial stability (Skeel, D. 2010).
However, controversy roams around the true ability of “the Act” in sustaining the
outrageous leverage and skeptical trading ideologies that were undertaken in
previous years. The main argument surrounding “the Act” is the fact that it
strengthens existing regulatory limitations on the growth of TBTF11
institutions
however, dismissing significant loopholes in the system12
. Section 623 of the Act
6
Geffen, D. & Fleming, J. (2011.)
7
Duke, E. (2009)
8
Value at Risk
9
Value at Risk
10
Triana, P. (2012)
11
Too Big To Fail
12
Wilmarth, A (2011)

10

specifies a 10% deposit cap to all interstate mergers and acquisitions for insured
depository institutions, the provision however contains loopholes that would allow
future lobbying for further exceptions (Wilmarth, A. 2011). In addition to the
stringent procedural requirements of “the Act” which would add to the Funds
expense costs and information turn over to investors.
In scope of the evolving world of securities, crucial risk measurements need to be
considered in an attempt to analyze the risk determinants in Mutual Funds. Five
elements of concern in my study are Alpha, Beta, R-Squared, Standard Deviation
and Tracking Error. The use of historical data in forecasting investment risk and in
turn comparing it to the market benchmark can be seen as a way to filter out
excessive risk, as well as enable investors and managers to use these statistical
measures as means in the implantation of the “Modern Portfolio Theory” (Elton, E.
et al. 2011). In essence the investment risk measures that will be of interest in our
study will give an on looking view of risk and return payoffs in both Bull, Bear and
normal market conditions.
A i m , O b j e c t i v e s a n d H y p o t h e s i s
The aim of this analysis is to examine the impact of regulations, specifically the
Dodd Frank Act, Wall-street Reform and Consumer Protection Act on Mutual Fund
performances. The abusive leverage usage has lead to skeptical and untrusting
grounds between policy makers and the investment sector. The escalating risk
measures have alarmed global markets and have lead to a “lost in translation affect”
on actual security measures. The relationship attributing to the evolution of
derivative usage and their effect on modern trading, (pre and post crisis) have
resulted in the changes of derivative strategies. The difference and change in hedging
attitudes of firms as a result of regulation constraints, has lead to many firms
eliminating their proprietary trading (Guilfoyle,S. & Farzad, R. 2012). The
elimination of proprietary trading departments is a key aspect on how the Dodd
Frank Act has altered the landscape of the modern investment environment.
The first objective of this research is to first, provide a regulation overview on the
Dodd-Frank Act stating the main attributes, including, the Wall Street Reform and
Consumer Protection Act, and the Volcker rule. A description of the regulations is
important in setting the scene for the specific investment areas that have caused

11

major damages in global markets, aiding in the implementation of such strict control
.The second point is to attempt to link specific regulation restraints with Mutual Fund
performances including high leveraged trades. The relationship of pre and post crisis
trading strategies will attempt to underline the “toxic leverage levels” that have lead
to such regulatory measures. Thirdly, examining the effect of regulation in
controlling “black holes” of the derivatives trade. The Dodd Frank Act addresses
potential “gaps” in the financial system in an attempt to better regulate and decrease
future leverage abuse. Concluding the study will present the underlining relationship
between points one, two, and three, underlining the relationship between these three
points will form grounds of ‘modern trading’ and the development of the new
securities markets.
Hypothesis: There is a negative relationship between regulation and Mutual Fund
performances pre and post crisis.
Null hypothesis: There is no link between regulation and Mutual Fund performances
L i t e r a t u r e R e v i e w
The literature review will establish a background of key factors of this research
primarily the Dodd-Frank Act; Title VII and its reforms. The regulation analysis will
give a backdrop of the evolvement in the derivatives markets that specifically affect
Mutual Funds which highly trade in such instruments and that have similar attributes
to Hedge Funds. Liang, B. (1999) discusses the correlation of average Funds returns
with matters concerning incentive fees, Fund assets, and the lockup period. This adds
value to the regulations that have been set up in attempting to decrease risk, adding
to trading constraints, which in turn affects returns. It is important to note Mutual
Fund managers risk management guidelines, to attempt and address key trends in
behavioural outcome pre and post crisis (Longo, J. 2009). Liang, B. (1999) also shed
light on the lifecycle of Funds giving a background of the time span of Funds, as
well as new emerging Mutual Fund trends.
Geffen, D. and Fleming, J. in 2011 emphasised the revelations that lead up to such
drastic regulatory measures as a large response to the credit crisis. The usage of
excessive, complex leverage and tranches caused a loss of information to arise. This

12

loss of information undervalued and confused the true underlining market volatility,
thus leading to a narrower investment environment.
The world of high leveraged Mutual Funds was once known as an opaque trading
environment and as featured in Ackermann, C., R. Mcenally and D. Ravenscrat,
(1999) Hedge Fund study; the amount of trading freedom that such Funds were
allowed to undertake between 1988-1995 before any set regulations were in place,
can clearly reflect the new restrictions constrains on profit-maximising opportunities.
Pre-regulation Funds emphasised the usage of leveraged investments, short selling
and concentrated on aggressive derivative investments. However, such excessive
leveraging and flexible trading environments are not accessible after the Dodd-Frank
Act was passed. The structure and regulation of financial markets has well
transformed since its introduction (Spencer, P. 2000).
The reaction in which markets used to approach asymmetric information and the
microstructure regulation of capital markets has also been altered, adding to the
complexity of information revelations. Edelen, R. & Warner, J. (1999) have
examined the relationship between information flow and returns in the US equity
market, stating “a positive relationship” influencing trading returns. The common
reaction to asymmetric trading information however has a “one day lag”, reflecting
the markets reaction to new available information.
The behaviour of options to such changes in information flow are reflected in its total
‘Value at Risk’ and as Boer.P (2002) signifies, the role of governments in managing
risk is reflected in options true total value. Brown, K. et al (1996)
13
and Chevalier and
Ellison (1997)14
have all articulated the negative relations between past performance
and changes in risk, accredited to incentive manipulations by managers. This can
clearly be backed up with the Dodd Frank Acts persistence in monitoring Fund
environments and manipulation loopholes, as well as information transparency.
The aftermaths of such rigorous regulatory procedures came to no surprise, as the
amounts of “toxic leverage” in our financial markets have led the world into a very
dark era. To comprehend the changes in trading attributes, an introductory look into
13
Of Tournaments and Temptations: An analysis of managerial incentives in the mutual fund industry
14
Risk Taking by Mutual Funds as a Response to Incentives.

13

Mutual Funds appraisals need to be regarded. As Black, K. (2004) states the different
Mutual Fund performance measures truly underlines the gaps in leverage valuation
in which post crisis undervalued risk, specifically the VAR15
measure.
Adding to the attributes of a Mutual Fund, and to understand the implementation of
the Dodd-Frank Act, one must truly understand derivatives in specific. Reynolds,
B.(1995) describes derivatives as the “wild cards” of international finance, these
complex financial tools have transformed from their original scope into today’s
modern financial world. Derivatives first merged as ways to hedge against risk,
however this changed to excess speculative trading activities in the recent decade
attributing to the 2007 crisis and the introduction of aggressive reform Acts such as
the Dodd-Frank Act.
Mutual Funds are now Americans' favourite retail financial product. Fund
assets exceeding $7 trillion are held by 88 million shareholders representing
51% of U.S. households. From 1990 to 1998, fees paid by owners of stock
mutual funds rose from $2.5 billion to $22.9 billion, an 801% increase
(Bullard 2001).
In the scope of differed movement towards mutual Funds, managers have had to deal
with numerous charges (expenses) to the semi annual reports that need to be
published and sent to investors.16
Adding to these numerous charges as a move to
increase transparency, Funds are also required to adhere to the mounting Federal
registration fees and State regulations that need to be financed, which are all paid
from the Funds assets (Chance, D. and Ferris, S. 1987). During these past years
however and with the escalated fee charges, John Bogle (2001) argues that a mere
60% of total expenses are actually spent on Fund operating expenses, while the
remaining 40% are pre tax profits. Extensive fees also refereed to as “loads”, are
used in Fund activities such as “front load” which are paid at time of purchase and
“back load fees” at times of sale both of which are calculated as a fraction of the
amount invested (McLeod, R. and Malhotra, D. 1997).
15
Value at Risk
16
Ruiz-Verdú, P. & Gil-Bazo, J. (2007)

14

“12b-1 fees” were first introduced in the 1980’s as marketing and distribution costs,
however by the 1990’s different Fund classes incorporated different load fees.17
The
most common classes are the A-Shares; they are comprised of high-end loads and
low annual 12b-1 fees. Classes B and C shares usually do not require a front load fee
but have higher 12b-1 fees and a deferred sale load. A typical one-year scope for
Class C shares is six to seven years, for B shares are the average time spans for both
these share classes.18
Numerous scholars and researchers have concluded that 12b-1
fees are a major factor in increasing expense ratios of a Fund such as Chance, D. and
Ferris, S. (1987)19
, Chance, D. and Ferris, S. (1991)20
, McLeod, R. and Malhotra, D.
(1994)21
, McLeod, R. and Malhotra, D. (1997), and Rao,U. (2001)22
.
Excess leverage was a crucial player in the financial crisis leading up to the
establishment of the Dodd Frank Act. Most private equity Fund managers were using
derivatives as a mean to leverage their portfolio in an off-balance sheet way23
. This
can be overseen in a period of high returns; however, a steep downside at times of
low returns is revealed 24
as shown below in graph 1. The strategy used in a Funds
trading, transparency and risk tolerance all add to its ability to hedge against any
systemic risk. Short and long positions can act as either risk mitigators or
augmenters, and can be combined in different ways for diversified purposes. For
example, short selling gives a limitless exposure in an increased value scenario; on
the other hand, a long position has a limit loss of the securities value (Stowell, D.
2010). Such a “lock in” position may be configured and it depends on the risk
appetite of the Fund manager in attempting to control the attributed risk.
17
McLeod, R. & Malhotra, D. (1994)
18
Chance, D. & Ferris, S. (1987)
19
The Effects of 12b-1 Plans on Mutual Fund Expense Ratios: A Note
20
Mutual Fund Distribution Fees: An Empirical Analysis of the Impact of Deregulation
21
A Re-examination of the Effect of 12b-1 Plans on Mutual Fund Expense Ratios
22
Economic Impact of Distribution Fees on Mutual Funds
23
Stowell, D. (2010)
24
Stowell, D. (2010)

15

Graph 1
Transparency was also a key scenario in the evolvement of regulations25
, however
the opaqueness that was surrounding hedge Funds and private equity Funds were
given their last chance in the 2007-2008 financial crisis. We no longer live in an
environment that truly trusts Fund managers, as the abuse of arbitrage and
speculation has left these tools in a highly monitored arena to a level of excessive
control, devaluing their free potential. In the lack of available information to track
any trading warning signs, the secretive world of hedge Fund and private equity has
maximised investors exposure to risk in ways of limited liquidity available as well
impairment of investment values.
Risk tolerance and systemic risk are two debatable topics surrounding derivative
usage. Derivatives are extremely challenging in analysing and valuing them (Stowell,
D. 2010). Systemic risk can be adhered to as a financial ripple that has similar
characteristics as a domino effect. This risk is created by two ways, (1) the failure of
several Funds during the same period sparks a firesale of financial and real assets
causing distress across the asset class, (2) the link between banks and Funds that
highly traded with derivatives can cause large losses to be incurred by both the Fund
and the bank itself, thus affecting the banks credit and capital credibility 26
.
25
Stowell, D. (2010) including graph 1
26
Stowell, D. (2010)

16

A repetitive theme in mitigated risk is the over exposure of banks to private equity
Funds (including but not limited to Hedge Funds and Mutual Funds). This
reoccurring scenario has lead to several large capitalised Funds to collapse and go
out of business. The failure of Long-Term Capital Management in 1998 required the
aid of 14 investment banks that were under the Federal Reserves supervision.27
The
crucial aid needed to bailout LTCM28
is based upon the “chain reaction of
insolvencies” that Edwards, F. & Morrison, E. stated in 2004 regarding the risk
management procedures underway for large market players when they are faced with
distress scenarios. Amaranth Advisors in 2006 set another example for the over
exposure of banks with Hedge Funds and other private equity Funds that traded
highly with derivatives (including Mutual Funds).29
In 2006 the Bank of England
Deputy Governors speech regarding financial stability, a conciliation on his behalf
was made on systematic risk developing however he did not focus on derivatives in
Fund trading as the sole cause of the crisis. Such a bold statement had various parties
disagreeing in the form of investment management that underwent during the crisis.
A study in the Federal Reserve Bank of Atlants Economic review denotes the BOE30
statement and concludes the enormous dependency between the Funds material
impact on hedge Fund returns, which in turn increases risk as well as excessive
leverage levels.31
Since the 2007 credit crisis, governments were pressured into better regulating the
global markets in an attempt to protect consumers. The dramatic fall of companies
that were marked as “Too Big to Fail” seemed doomed in a catastrophically
background. Collaborated by complex CDO32
, “toxic leverage” level33
, and an
abundance of un-transparent transactions, it was only evident through looking
through the history of regulation that a step needed to be taken. A key aspect of the
impact of regulation in terms of Funds performances and how the decrease in
leverage and abundance in derivative trading is reflected in both risk and stated
returns.
27
Edwards, F. & Morrison, E. (2004)
28
Long Term Capital Management
29
Stowell, D. (2010)
30
Bank of England
31
Chan, N. et al. (2005)
32
Collatorized Debt Obligations
33
Triana,P. (2012)

17

The attractiveness of actively managed Mutual Funds, is the aspect of its daily
trading based on its NAV34
. The appealing characteristic of Mutual Funds is viewed
in the actual performance in the Fund disregarding any management pricing ability.35
In scope of the increased investor preference to Mutual Funds an observable increase
in Fund fees is evident, producing a negative relationship between fees and
performance.36
This dynamic relationship can be explained as a way of
differentiating between the investors degree of “performance sensitivity”37
, which
brings us to our theme of regulatory measures to attain fair and equal financial
standards. The significant variations in risk-adjusted Fund returns as described by
Sharpe in 1966, are all largely derived as a result of differences in Fund fees. Mutual
Funds requirement fees are incurred through the service that the Fund offers to its
investors as a price to the management thus reflects the risk-adjusted performance.38
The importance of risk measurement and historical criteria is of immense
significance in an attempt to identify the risk and return of Mutual Fund payoffs.
Managers have been accustomed in association with Alpha based returns, as they are
independent to the market’s current position39
. In 2008 Fama, E. and K. French40
examined the differences in Alpha’s before and after fees and expenses of a Fund,
their study resulted in an observable behavior and negative trend between expenses
and Alpha numbers. In addition it has been examined by Huij, J. and M. Verbeek
(2009)41
that higher Alphas are associated with value oriented Funds, and growth
specific Funds tend to have lower Alphas. Emphasis needs to be acknowledged when
it comes to statistical models, in 1993 Fama, E. and K. French (1993) three-factor
model had a downward bias with value Funds, and an upward bias with growth
Funds. Therefore it is of extreme importance to distinguish the Alpha used, and
collaborate it with other risk measures such as Bate, R-Squared, Standard deviation
and Tracking error.
34
Net Asset Value
35
Gruber, M.( 1996)
36
37
38
39
Stowell, D.(2010)
40
Mutual fund performance
41
On the Use of Multifactor Models to Evaluate Mutual Fund Performance

18

M E T H O D O L O G Y
An archival methodology is first used for data retrieval of historical market prices. A
Fund screening process is used to randomly select the largest Fund assets under
management. Fund screening criteria is then applied as the following: actively
traded, Mutual Funds, large capitalisation, long term investment (10 years and
above) and trading in the US with a derivative trading strategy. The Funds and their
historical market prices including year to date returns are used for comparisons and
mean return analysis. An analytical tool in the collaboration of Funds and their
information is used to produce conclusions of relative value to date. Descriptive
statistics is then used to showcase the pre and post crisis performances; this will
demonstrate the trade off between excess leverage levels and return. Signs of excess
exposures and volatility levels are reflected in the causes of regulation on specific
trading strategies. Overabundance in leveraging can be observed in the Funds
standard deviations and beta, both of which are reflected in the Funds return.
Theoretical methodology is applied to articulate the importance in comparing value
to the applied regulatory trade restrictions. Both the theoretical methodology and
analytical tools are used in an attempt to understand how financial tools have
differed in regards to the set limitations. The description and analysis of the
methodologies illustrated earlier are important to assess the implications of the
differences in regulations have had on economic performances. A stress point,
however, is crucial in terms of comparison by similar assets under management and
inception dates which need to be considered in scope of this analysis, as a fair
valuation insurer. Additional information of precision is outlined in the screening
criteria of Funds to attempt and clarify an unbiased Fund selection. Large Fund
assets Capitalisation42
, and a minimum 10 year inception period is applied to test the
implications of pre and post crisis measures. To achieve the sample size needed in
this analysis, one must attempt and conclude broader yet precise final results in a
comprehendible framework. Preceding the Fund screening which geared in 16 funds
that fit the needed profile, a portfolio was set up in Bloomberg containing both these
16 funds and all members of the S&P 500. This portfolio was set up to calculate the
Value at Risk through the Bloomberg terminal. Value at Risk is a crucial measure of
market risk exposure, and one of the main tools behind bank capital requirements
42
Assets Under Management

19

that aided in regulation measures for specific trading positions43
. However VAR 44
cannot be the only risk measure associated with excess leverage, since it is regarded
as biased in its scheme to only involve past historical prices that do not reflect the
assets future risk measures45
.
D a t a C o l l e c t i o n M e t h o d a n d T y p e s o f D a t a
A panel data collection method (Ghauri, P. N. and Gronhaug, K. 2005) will be used
in Bloomberg to derive yearly returns for the period 2002-2007 and 2008-2011 of the
specified Mutual Fund. The period analysis is key in articulating the changes in
acceptable leveraging in contrast to the return percentages pre and post crisis impact;
adding to the analysis, the concentration on their performance and derivative
strategy. The focus on Mutual Fund performances on the basis of their trading
strategy is epic in reaching the hypothesis on the correlation between regulation and
return. Times series evaluation46
will then form a foundation to the findings of pre
and post crisis volatility in performances, which is crucial in the investigation of the
level of optimal exposure. The accumulated and evident diminution of leveraged
regulatory space is important in shedding light on the amount of “toxic leverage
levels.” (Das, S. 2010) . A cross-sectional data retrieval (Oleret et al. 2010) of
specified variables will be present in an attempt to filter out the Mutual Funds
specified and to try and avoid bias Fund pickings. Funds with the most assets under
management will be targeted regardless of their yearly returns; in collaboration with
industry and Fund size, a screening filter will give a larger sample size to the study
emphasising a broader view. Concluding the usage of data collection method as well
as the time-series data base (Oleret et al. 2010) of the stated 10-year analysis period.
A visual view of the trends in performance and the impact of the Dodd Frank Act in
regulatory constraints will be core in testing and studying the evident arena of
Mutual Funds.
43
Triana, P. (2012)
44
Value at Risk
45
Rogers,J. (2002)
46
Ghauri, P. N. & Gronhaug, K. (2005)

20

D a t a A n a l y t i c a l T o o l
The research will be based on empirical data collection and will include descriptive
and inferential statistics, (sample errors and random variables), to attempt and reach
a conclusion on the findings and the question addressed. Descriptive statistics will be
used to address the mean, standard deviations and quantitative measures, such as
Beta, R-squared and Sharpe Ratio will be integrated in the regression reports of the
Funds. The mean will measure the average rate of return of the Funds, given a
perspective for comparison opportunities. Standard deviation is essential in
measuring the risk attributed to the leveraging miss-caps, thus reflecting the pre and
post crisis positions. In addition to expressing the differences in risk and return
momentum, it is crucial to try and highlight any outliers that have occurred.
Inferential statistics is then looked at to test the hypothesis of how regulation has
affected the returns of the Funds providing the change in returns (multivariate
statistics). Both Statistical analysis and quantitative analysis is used to address the
hypothesis. The trade off, in attempting to test the hypothesis is in need of both these
analytical methods to form a foundational ground for support. The usage of both
analytical and empirical methods will be used to attempt and filter through both
mathematical findings and proposed scenarios of journal reviews and theories. As the
topic of capital markets regulations are still evolving to this day, a precise theoretical
measure and equational analysis may not be perceived with precise clarity. As is the
actual effect of the Dodd Frank Act on Fund performances47
, what can be done is
hypothetical and with the usage of both descriptive and statistical analysis as
gathered evidence.
47
Geffen, D. & Fleming, J. (2011.) How the Dodd-Frank Act should Affect Mutual Funds, Including Money
Market Funds

21

“ T H E A C T ” R E L E V A N T P R O V I S I O N S
F i n a n c i a l S t a b i l i t y O v e r s i g h t C o u n c i l
The creation of the new Financial Stability Oversight Council has been a major
influence in redesigning the regulatory financial landscape (Fein, M. 2010). The
FSO48
Council is responsible to espy any financial risk attributes that may interfere
or threaten the financial stability of the United States. A key element of this
provision is to advocate and promote the needed market discipline in regards to
speculation and counter party expectations. The Council is also responsible for non-
regulatory actions such as gathering of information that is of risk relevance to any
indications of present or future stability concerns. The council is also responsible in
reporting to Congress on any concerns they might have and provide general
supervisory recommendations.49
F e d e r a l R e s e r v e B o a r d
In an attempt to better monitor large capitalized firms, the Federal Reserve Board is
required to monitor companies that have assets of $50billion or more. The
monitoring of such companies is based upon a number of categorizations (standards)
relating to their capital structure, riskiness, complexity, financial activities as well as
any risk attributed factors50
. In order to adapt to different company values and
categorization the stringent standards increase as risk increases (Fein, M. 2010). Risk
management is key in further developments of the standards and implementation, to
control the damages incurred by excess leverage and escalated risk levels of the past
years.
P r i v a t e F u n d I n v e s t m e n t A d v i s e r s R e g i s t r a t i o n A c t
o f 2 0 1 0
In order to implement the needed transparency to end the opaqueness surrounding
Private Funds, the Act sets a vivid backdrop to future reporting clarity. An
48
Financial Stability Oversight Council
49
The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) Pub. L. No. 111-203
50

22

exemption however is present for both Venture capital Fund advisors51
and AUM52
that are under $150 million as well as family offices, however the exempted entities
need to register with the SEC53
. Adjustments in defining accredited investors over a
four year base as an insured transparency procession. In an attempt to enhance public
disclosures it is essential to take into consideration an entities risk profile, capital
sufficiency and the capability to manage risk (Fein, M. 2010).
T h e V o l c k e r R u l e
Amended after ‘The Bank Holding Company Act’ of 1956, the Volcker rule targeted
the increased speculation levels that large firms and banks were subjected to . The
Volcker rule limits the investments of banks in such speculative activities to no more
than 3% of the banks Tier 1 capital54
. The Volcker rule main limitations is the
prohibition of proprietary trading and the conflicts in interest trading, both of which
caused numerous large firms to default55
(Act § 619). The Volcker rule entrenches
that banks are managed and capitalized in an orderly manner as to not threaten and
potentially harm its investors or the economy (Act §118). The rule is scheduled to
take effect on July 21, 2012 however a lot of skepticism and lack of confidence in
the rule is causing conflicting ideas over the precision and effectiveness of the
Volcker rule in curbing excess risk that has lead to such a drastic crisis56
.To some,
the rule is viewed as complex and challenging in evaluating the distinction between
prohibited and permitted trading. The distinction between what can be traded and
what cannot is tested within the complexity of the regulation combined with its
difficulty in both describing it exactly and evaluating it in practice (Clarke, D. and
Alper, A. 2011).
W a l l S t r e e t T r a n s p a r e n c y a n d A c c o u n t a b i l i t y
Title VII of ‘The Act’ regulates the OTC57
market including credit default swaps and
credit derivatives58
, which were the main characters in the failure and collapse of
51
Bill Summary & Status 111th Congress (2009 - 2010) H.R. 4173
52
Assets Under Management
53
54
55
Act § 619 to be codified at 12 U.S.C. § 1851(h)(4)).
56
Clarke , D. and Alper, A. (2011)
57
Over the Counter
58

23

numerous firms’. To better regulate these derivatives, ‘The Act’ requires swaps
traded ‘Over the Counter’ to be cleared through clearinghouses or exchanges. This
regulatory shift in the freedom of past OTC59
activities clearly reflects the dangers of
what some are calling “weapons of mass destruction” to the business world60
. Under
‘The Act’ both the Commodity Future Trading Commission and the Securities and
Exchange Commission are required to collaborate and communicate with the Federal
Reserve on any new regulator needs to be in place. Title VII states, "Except as
provided otherwise, no Federal assistance may be provided to any swaps entity with
respect to any swap, security-based swap, or other activity of the swaps entity "(Act
§126). The implementation of such rigorous and controlled regulatory reins are all to
insure the efficiency, security and transparent market transactions underway.
R e g u l a t i o n o f S w a p M a r k e t s
Section 722 of the Act, amends the Commodity Exchange Act with relation to
security-based swap agreements as well as security based swaps. The act amends the
previous usage of swaps as insurance based and its regulation as an insurance
contract. The act also excludes the jurisdiction of swap activities unless they are
directly active in the US. The Act requires swaps need to be submitted into a clearing
house for regulatory and security purposes until they are cleared, any activity that is
engaged without being cleared would be an unlawful act61
. The Act is also intricate
with futures commissioned merchants that are not registered with the Commodity
Futures Trading Commission, for and on behalf of a customer engaging in margin
guarantee (including money, securities or property acquisition) all resulting from a
swap. Transactions under section §741 of the Act, exclusive authoritative
enforcement of the swap market have been granted to CFTC62
, as well as authorizing
any uncompelled prudential requirements set forth by the authority. The Acts also
proclaims the CFTC63
to pay a 10%-30% monetary sanction to commodity
59
Over the Counter
60
Das, S. (2010). Traders, Guns & Money
61
62
The Commodity Futures Trading Commission
63
US Commodity Futures Trading Commission

24

whistleblowers of monetary sanctions exceeding $1 million dollars. All as means to
better influence information flow and transparency in the market.64
I n v e s t o r P r o t e c t i o n s a n d I m p r o v e m e n t s t o t h e
R e g u l a t i o n o f S e c u r i t i e s
Under Title IX of the Act an increase in investor protection and regulatory
enforcements are added, in addition to proposed remedies to the provisions under the
Act to previous regulations. The Act improves varies areas to better regulate the
market as well as agencies such as credit rating agencies to better verify all factual
elements present. Subtitle E of the Act deals with the accountability and executive
compensations65
. The subtitle emphasis shareholder approval over executive
compensation, including payable actions such as a golden parachute compensation.
In addition a disclosed filing needs to be addressed to the SEC on the median annual
compensation of all employees in a company and the chief executive officers total
annual compensation66
. This provides the government with accessibility to past
outrageous executive pays.
A c c o u n t a b i l i t y a n d E x e c u t i v e C o m p e n s a t i o n
Title IX of the investor protection clause manages the SEC67
requirement to issuers
to develop and implement a policy for: (1) disclose incentive- based compensation
policy that is formed on financial information based upon the securities laws; and (2)
the restatement of noncompliant material from the issuer on accounting basis
reflecting the reporting requirement. The second clause also pertains incentive-based
compensation to “current or former executive officers” within a three- year period.
The development of such an incentive based policy, is in light, to better mitigate
erroneous data under specific accounting requirements
64
Bill Summary & Status 111th Congress (2009 - 2010) H.R.
65
section 951 of The Dodd Frank Act
66
67
US Securities and Exchange Commission

25

R E S U L T S
Mutual Funds are accustomed to systematic, actively traded, and leveraged
approaches in the market. Therefore, any set restrictions will hinder that momentum
and flexibility to a level of constrained profit and Fund return. These dynamic
strategies are produced through market inefficiencies. Set regulations that aim to
restrict an amount of leveraged outcome and an ultimate transparent market, will
therefore affect returns immensely. The increase in popularity for Mutual Funds was
attributed to its low correlation against major indices returns (Acar, E. 2002). In
conclusion, I believe that the excess restrictions on Mutual Funds, specifically OTC
markets and derivatives will produce slow growth in Fund return. As a safety
precaution for investors it is most necessary under the present lack in trading
confidence, to increase the regulatory precessions in Fund trading. However, for
Fund managers it lingers their freedom to achieve optimised returns when clearly
there is a lack of liquidity in the markets.
M u t u a l F u n d s S c r e e n e d
Sixteen Funds all domiciled and trading in the United States market, benchmarked
against the S&P 500 will be the focus of study in this paper. The inception year for
all these Funds range between 1993 to 2002, to better articulate the trends in leverage
capacity and momentum over an adequate amount of time 68
.
FUND 1: “PSPTX US”
PIMCO StockPlus total return Fund, is an open end Fund incorporated in the USA.
The aim of the Fund is to achieve returns greater than the S&P500 Index. The
investment is mainly in derivatives traded in the S&P 500 backed by a portfolio of
fixed income instruments. It is an open end Fund with a main focused strategy in
derivatives. Inception date is 28/06/2002 with a minimum investment of USD 1
million, assets as of 31/05/2012 are USD 429.57 million and an NAV69
to date of
USD 8.50. The Funds expense ratio is 0.64% and a management fee of 0.39%.
68
Bloomberg Terminal Data source
69
Net Asset Value

26

FUND 2: “PTOAX US”
PIMCO StockPlus total return A- Fund, has similar fund objectives as Fund 1,
however it is retail oriented and requires a minimum investment of USD 1,000. This
Fund has a front load fee of 3.75% which is basically a sales charge payed by the
investor70
when the shares are purchased, and a back load fee of 1% payed in when
the shares are sold 71
. Inception date 28/06/2002 with an NAV to date of USD 8.46
million and assets to date of USD 429.57 million as of 31/05/2012. The Funds
expense ratio is 1.04% and management fees of 0.39%
FUND 3: “PSTDX US”
PIMCO StockPlus total return D- Fund, similar to PTOAX US minimum investment
requirement, this Fund does not however require a front or backload fee only a
management fee of 0.39% and an expense ratio of 1.04%. The Fund has a 0.25%
12b1 fee, which is basically an annual marketing and distribution fee set out for
mutual Funds to gain more exposure72
.Since 2002 the Fund has accumulated an
NAV of USD 8.38 million. The Fund mainly invests in derivatives however, hedges
its risk by a portfolio of fixed income, its geographical focus is the US and is an open
end Fund with an inception date of 28/6/2002.
FUND 4: “PTOBX US”
PIMCO StockPlus total return B- Fund, has a geographical focus in the US with an
minimum investment of USD 1,000. The Fund has generated an NAV of USD 8.17
million since its inception in 28/06/2002. The Fund has an early withdrawal fee of
3.50%, current management fee of 0.39%and a 12b1 fee of 1%. The Fund has an
accumulated asset base of USD 429.57 million as of 31/05/2012 coincided with an
expense ratio of 1.79%. The Fund has an investment objective of exceeding the total
returns of the S&P 500 index, investing mainly with derivative instruments.
FUND 5: “PSOCX US”
PIMCO stocksPlus total return C- Fund, has an investment objective of surpassing
the S&P 500 return with assets as of 31/05/2012 of USD 429.57 million. The Fund
70
En.wikipedia.org (2012)
71
72

27

has a minimum investment of USD 1,000 and an expense ratio of 1.79%. The Fund
mainly invests in derivative assets in S&P 500, however as its subsidiaries73
it
hedges by a fixed income portfolio. The Fund has a clause of early withdrawal and a
1% fee for both early withdrawals and a 12b1 marketing fee. Since its inception in
08/06/2002 the Fund has an NAV of USD 8.15 million.
FUND 6: “RYNCX US”
Series Nova Fund C is an open end Fund incorporated in the US, the Funds
objectives is to correspond with the S&P500’s 150% performance level. The Fund is
a subsidiary of the Nova Master fund which mainly invests in leveraged instruments
such as options, futures, stocks and equity securities. The Fund has an NAV to date
of USD 21.83 million and total assets of USD 44.44 million as of 14/06/2012. The
minimum investment requirement is USD2,500 with an expense ratio of 2.29%.
Other fees include a backload fee of 1%, management fee of 0.75% and 12b1 fee of
1%.
FUND 7: “DXRLX US”
Direxion Monthly Small Cap Bull 2x Fund is an open end mutual Fund emphasized
in derivative investments. The Fund mainly invests in options such as future
contracts, swap agreements , stock index futures contracts and options on securities
as well as stock indices. Net Asset value amounting to USD 40.42 million and assets
as of 14/06/2012 totaled to USD 9.26 million. The Fund requires a minimum
investment of USD 25,000 with an expense ratio of 1.90%. Total management fees
are 0.75% with a 12b1 fee of 0.25%. The Funds inception was in 22/02/1999 and
with an objective return of 200% of the index.
FUND 8: “RYNAX US”
Rydex Series Trust- Nova Fund, is an open end Fund incorporated in the US with an
inception date of 15/10/1998 and its main objective is to provide results of 150% of
the performance of the S&P 500. The Fund invests in all assets of the Nova Master
Fund including leveraged instruments that include future contracts, equity and
options securities as well as stock indices. The current management fees are 0.75%
73
FUND 1: “PSPTX US”, FUND 2: “PTOAX US” , FUND 3: “PSTDX US” , FUND 4: “PTOBX US”

28

with a 0.25% of 12b1 fee. The minimum investment needed is USD 2,500 with an
expense ratio of 1.79%. The NAV outstanding is USD 22.84 and the Funds assets as
of 14/06/2012 is USD 44.44million.
FUND 9: “MWATX US”
Metropolitan West AlphaTrak 500 is an open end Fund that has an investment
objective of exceeding the S&P 500 total index return. The Fund combines both non-
leverage investments in the S&P 500 futures as well as hedges its position with a
portfolio of fixed income instruments. The Funds inception date is 29/06/1998 and
has an NAV to date of USD 437, as well as requiring a minimum investment of USD
5,000 and a current management fee of 0.62%. The funds assets as of 14/06/2012 are
USD 5.27million and charges a expense ratio of 0.97%.
FUND 10: “PSPDX US”
PIMCO StocksPLUS Fund is an open end Fund trading in the US with an investment
strategy comprised of derivative assets invested in the S&P 500, with a hedging
strategy of fixed income instruments to offset any accumulated systematic risk. The
Funds inception date is 08/04/1998 and has accumulated an NAV of USD 7.89
million through out. The current management fee and 12b1 fee are both at 0.25% in
addition to an expense ratio of 0.90%. The Funds assets as of 31/05/2012 is USD
1.02 billion and aims to succeed the return of the S&P 500 index.
FUND 11: “PSPAX US”
PIMCO StocksPLUS A- Fund has a derivative based strategy with an objective to
exceed the returns of the S&P 500. The Fund requires minimum investment of USD
1,000 and an expense ratio of 0.90%. Since its inception date in 20/01/1997 the Fund
has achieved an NAV of USD 7.93 million dollars and has backed its assets with a
portfolio of fixed income instruments. The Fund has a front load fee of 3.75%, a
backload fee of 1% and a 0.25% current management fee as well as a 0.25% 12b1
fee. The Funds assets to date as of 31/05/2012 are USD 1.02 billion.
FUND 12: “PSPCX US”
PIMCO StocksPLUS C- Fund is geographically focused in the US, with an open end
derivative strategy. The Funds assets as of 31/05/2012 is USD 1.02 billion, due to its

29

share classification (retail) it has a minimum investment of USD 1,000 with an
expense ratio of 1.40%. The Fund charges a backload fee of 1% and aims to exceed
the S&P 500 index returns. The Funds NAV is at USD 7.69 million with a current
management fee of 0.25%. To hedge off any systematic risk the Fund has a fixed
income portfolio and maximizes exposure with a 12b1 fee of 0.75% as a marketing
tool.
FUND 13: “PSPBX US”
PIMCO StocksPLUS B- Fund, is an open ended Fund with a trading focus in the US.
The Fund has a strategic preference in the S&P 500 derivatives, with total returns
objective exceeding the index. The NAV is at USD 7.59 million and assets as of
31/01/2012 of USD 1.02 billion as well as a minimum investment of USD 5,000.
The expense ratio is set at 1.65% and requires a backload of 5%. The current
management fees are marked at 0.25% and a 12b1 marketing fee of 1%.The Fund
has an inception date of 20/01/1997 and is categorized at a retail share class.
FUND 14: “PPLAX US”
Pimco StocksPLus Admin Fund is an open ended derivative strategy that is
incorporated in the US. Similar to “PSPDX US”, Fund it invests all its assets in
derivative based investments in the S&P 500, however backs it up with a portfolio of
fixed income. The Fund has a NAV of USD 8.02 million and asset to date of USD
1.02 billion as of 31/05/2012. The Fund accumulated fees are 0.25% for both current
management fees and 12b1 fees. The minimum initial investment required is USD 1
million since it is an institutional share class, with an inception date of 07/01/1997.
FUND 15: “RYNVX US”
Rydex Series Trust is an open ended Fund that aims to surpass 150% of the S&P 500
index’s performance. The Fund invests all its assets in the Nova master Fund which
trades on leveraged instruments such as futures contracts, options on both securities
and stock indices in addition to equity securities. Since the Funds investment in
12/07/1993 it has accumulated an NAV of USD 24.69 million in addition to its
minimum investment requirement of USD 2,500, the fund has managed to have an

30

asset base of USD 44.44 million as of 14/06/2012. The Fund has a current
management fee of 0.75% as well as an expense ratio of 1.29%.
FUND 16: “PSTKX US”
PIMCO Stocksplus Fund-INSTL, is an open ended derivative based strategic Fund.
The minimum investment requirement is USD 1 million and requests a 0.50%
expense ratio. The Fund has an objective return which exceeds the return of the S&P
500 index. In addition the Fund has a current management fee of 0.25%. The Fund
has accumulated assets of USD 1.02 billion as of 31/05/2012 and an NAV of USD
8.27 million. The Fund has an institutional share class backed by a portfolio of fixed
income instruments as a hedge strategy.
F u n d A n a l y s i s P e r i o d 1 ( 3 0 / 1 2 / 0 2 - 3 0 / 1 2 / 2 0 0 7 )
The first analysis period has been set between December, 30th
2002 -December, 30th
2007, a five year period prior to the financial crisis will set grounds on the
performance and volatility of the Funds before any excessive regulatory and
economical restrictions have been in place. All sixteen Funds averaged a return of
84.997, and nine Funds have achieved lower returns than the average, ranging
between 71.3414 and 81.518. Although, the majority fall under the average return
they still fluctuate relatively close, showing their alignment in accordance to the
efficient frontier hypothesis74
. The Funds mean returns with regards to their
individual performances mainly are around 12 to 13, with only 3 Funds that retrieve
a mean of 19, however Fund number 7 “DXRLX US” is the only Fund that has a
return mean of 29.967 in addition to it being the highest volatility Fund with a
standard deviation of 13.49. The Funds Standard deviation for period 1, was notably
stable ranging between 3 to 6, which does not show a significant increased level of
volatility, however, as discussed previously only 1 Fund has a catapulting significant
volatility level which is an obvious outlier to the sample size.
A notable performance bias needs to be addressed with regards to Funds especially
during the period of 2002. The year of the “internet bubble burst”, The disastrous
September 11 attacks, as well as the collapse of Enron were merely some of the
74
Elton, E. et al. (2011)

31

factors that caused an excessive hike in volatility levels.75
This however, could not
be avoided since a 9 /10 year period needed to be analyzed, the concussions of 2002
can also be compared to the 2007 financial crisis in observing the performance
movement in times of an economical crisis as well as, the impact in performance
levels with an economical crisis as well as escalated restrictive regulatory measures.
A noticeable relationship is found between the highest volatility levels and Fund
inception dates. As shown in table 6076
, Funds with inceptions dates between 1993 to
2001 show increased volatility levels during 2001 and 2002, which clearly articulates
the aftermaths of a Bear market following three of the most peculiar crashes and
turmoil.
Table 60
Funds that had inception dates later then 2002 however show increased volatility
levels towards the end of 2007, reflecting the excessive volatility spill of the
2007/2008 financial crisis. The theory of silence before a storm can be clearly
reflected in the lowest recorded Fund volatilizes which are all considered in the years
of 2006 and 2007. Prior to the financial crisis of 2007/2008 and the 2002 crisis,
Funds actually show decreased volatility levels of 20%, 30% and 50%. The decrease
in overall risk volatility can be described in the returns, where the Funds that showed
comparably less risk (highest volatility versus lowest volatility) levels accumulated
large total returns a clear example was Fund 7 “DXLRX US”77
.
75
Triana, P. (2009)
76
Bloomberg terminal, Kingston University, London, UK
77

32

F u n d A n a l y s i s P e r i o d 2 ( 0 1 / 0 1 / 2 0 0 8 - 3 0 / 1 2 / 2 0 1 1 )
The devastative effect of the recent financial crisis is evident with the Funds returns,
where only 3 Funds showed positive returns, while the other 13 have had negative
returns totaling to a staggering -206.304. The mean return for all Funds during this
period was -12.354. The immensity of the situation can be further explained by the
Funds standard deviations that have increased by 11 to 15 points, and specifically
Fund 7 “DXLRX US” standard deviation which increased by 28 points. The
correlation between risk and return has been staggering (graph 61), however some
Funds with the same increased levels of standard deviation have also geared in
positive returns in contrast with the same level of risk which have had a negative
return period. This gives a view into the strategy involved and the diversification
level of the portfolio, with regards to the numerous factors including but not limited
to regulation, such as economic and political situations as well as available liquidity
in the market. Fund 1 “PSPTX US”, 2 “PTOAX US” and 3 “PSTDX US” all have
had a 11 point increases in their standard deviations in this 4 year analysis, but have
managed to have humble positive returns of approximately 2 to 4. In contrast to
Funds 10 “PSPDX US”, 11 “ PSPAX US”, and 12 “PSPCX US” who have had the
same level of standard deviation of 15 but have geared in negative returns of -8 and -
10. Suggesting return is not only correlated with risk and Fund maturity. Funds 1, 2,
3 have an inception date of 2002 where Funds 10, 11, and 12 have a start up date of
1997/1998 this clearly may be a reflection of the older Funds incurring a stronger
wave of crises (both the 2002 and 2007).
Graph 61

33

The lowest volatility levels have been recorded for all Funds in 2010 and 2011, since
the Dodd Frank Act was passed in 2010 this may be an indicator to the regulatory
constraints the Funds had to underpass and adhere to. The decrease in available
leveraging as well as derivative restrictions may all have been part of the noticeable
risk levels that have been slashed to over 70 points of their original volatility levels.
Some Funds have also showed excessive decreases of 98 points and 178 in contrast
to their peak risk levels and lowest risk available. For example Fund 6 “RYNCX
US”, Fund 8 “RYNAX US EQUITY”, and Fund 15 “RYNVX US” recorded their
highest volatility levels in 2008 of approximately 112 and the lowest recorded in
2011 of approximately 14.
F u n d A n a l y s i s ( d a t a r a n g e 3 0 / 1 2 / 2 0 0 2 - 3 0 / 1 2 / 2 0 1 1 )
A total period analysis of all the Funds during these nine years show a consistency in
both prosperity and turmoil for each individual Fund when compared to each other.
Ten out of the sixteen Funds showed total returns above the computed average of
61.25 and only five Funds geared in humble returns ranging between 41 and 54
(refer to graph 62).
Graph 62

34

The only noticeable decline was Fund 7 “DXLRX US” which had a return of -32.33
suggesting its higher volatility of 207 in 2008, which is about double the average of
all the Funds, yet in 2006 was inline with the other Funds of a recorded volatility
level of 16. This is an obvious result of Funds 7 high investment in derivatives and a
cementing result of the regulatory constraints and deleveraging of investment
banking capital (refer to graph 63).
Graph 63
All Funds showed their lowest volatility levels in late 2006 or early 2007 with an
averaged volatility of 8.351, Funds 6 “RYNCX US”, 7 “DXRLX US”, 8 “RYNAX
US” and 15” RYNVX US” are the Funds that had volatilities higher than the average
recorded at approximately 10 to 16. These same 4 Funds also recorded the highest
amount of volatility in contrast to the other 12 Funds during 2008 when the volatility
levels averaged to 95.813. Total period standard deviations also revealed that these
four Funds also had higher risk levels of 17.435 to 37.476 points during these nine
years. The same four Funds showed higher than the average in regards to the lowest
volatility sessions, articulating numbers greater than the 8.351 average by 7.88 to 2.3
point changes. Volatility suggests that the derivatives played a greater role then the
rest of the investment strategy of the Funds.

35

T r a c k i n g I n d i c a t o r s ( d a t a r a n g e 28/06/2002-31/05/2012)
Alpha, Beta, R-Squared, tracking error and standard deviation were all integrated to
track the Funds risk and performance payoff78
with regards to the market and
specifically the benchmarked index S&P 500 (SPX). A total measurement as well as
a look on Bull and Bear market sessions will help recognize the outliers and the
impact of any regulatory constraints.
Alpha, is the risk adjusted performance of the Fund as a measure of its volatility in
comparison to the index79
. The totaled alpha for the Funds amounted to a -1.514,
thus if all Funds were in one portfolio they would have underperformed the S&P 500
by 1.514%. Funds 1 to 5 and Fund 1680
are the six Funds were the only Funds with
positive Alpha ranging between 0 to 0.198, suggesting a modest over-performance.
An interesting conclusion arises when the Funds Alpha during a Bear and Bull
market was analyzed. In a Bull market 7 out of the 16 Funds showed over-
performance numbers, including the 6 Funds81
previously discussed as well as Fund
14 (PPLAX US). During a Bear market, interesting findings of 1182
Funds
outperforming while only 5 showed negative alpha’s. Suggesting the risk adjustment
and excess return to the market is negatively correlated at times of declining market
returns and as observed in graph 64.
Graph 64
78
Elton, E. et al. (2011)
79
Investopedia.com (n.d.)
80
PSPTX US, PTOAX US, PSTDX US, PTOBX US, PSOCX US & PSTKX US
81
PSPTX US, PTOAX US, PSTDX US, PTOBX US, PSOCX US & PSTKX US
82
PSPTX US, PTOAX US, PSTDX US, PTOBX US, PSOCX US, PSTKX US, MWATX US, PSPDX
US, PSPAX US, PSPCX US, & PPLAX US

36

Beta, as a measure of systematic risk to the Funds volatility and correlation to market
swings, a greater than 1 Beta suggest the percentage of excess volatility.83
In total, all
16 Funds show a Beta of greater than 1, suggesting their percentage of excess
volatility levels are sensitive to the market and price changes. 1.261 was the set
average of total Beta during both Bear and Bull market sessions. A noticeable and
predictable volatility level can be derived by the available data (graph 65), six 84
of
the Funds showed higher volatility in years of a Bull market and a decline in Bearish
markets. However, the ten 85
remaining Funds showed an opposite effect, where they
recorded higher volatilities in a Bearish market in contrast to lower levels in a
Bullish market. This may be an influence due to the amount of derivative investment
strategy incurred by these Funds. Four Funds86
have reoccurring higher Beta’s than
the average in all the available data concerning Bullish, Bearish and total Beta
numbers, while the rest of the 12 Funds all geared in lower Betas of the calculated
accumulated average of 1.261 total, 1.238 for a Bull market, and 1.283 for a Bear
market. A consistent relevant trend in volatility levels and reactions to the market is
vital in comparison and in the diversification of systematic risk.
Graph 65
R-Squared, a statistical measure of the Mutual Funds correlation or movement with
regards to the benchmarked index, in this case the S&P 50087
. According to
83
84
PSPTX US, PTOAX US, PSTDX US, PTOBX US, PSOCX US, RYNCX US
85
DXRLX US, RYNAX US, MWATX US, PSPDX US, PSPAX US, PSPCX US, PSPBX US, PPLAX US,
RYNVX US, PSTKX US
86
RYNCX US, DXRLX US, RYNAX US, RYNVX US
87

37

Morningstar88
an R-squared of 85-100 is regarded as a close performer to the index,
while a 70 and below is regarded as having a lower correlation to the index. Fifteen
out of the sixteen Funds showed total R-squared of 92 or greater, except for Fund
789
, which had an 82. This emphasizes that Fund 7 concentrated investment in
derivatives, did not mimic or come close to the index’s trading and total available
investments. A counter cyclical effect can be viewed in terms of periods of Bull or
Bear markets to the Funds statistical movement. Nine Funds 90
had figures of 93 to
99 reflecting a positive relationship with the index, however the same nine Funds had
figures of less than 85 when operating under a Bear market, reflecting the change in
volatility levels during these periods. The remaining seven Funds91
showed R-
squared levels of less than 85 in a Bull market, yet higher numbers of 85 to 100 in
Bear markets, graph 66 articulates the suggested higher correlation to the index in a
declining market situation.
Graph 66
Tracking error measures a Funds excess volatility with comparison to the benchmark
as well as tracking the percentage change in standard deviation differentiated
return92
. A noticeable correlation between the Funds Beta and the tracking error, in
88
Morningstar.com (2012)
89
DXLRX US
90
RYNCX US, RYNAX US, PSPDX US, PSPAX US, PSPCX US, PSPBX US, PPLAX US, RYNVX US,
PSTKX US
91
PSPTX US, PTOAX US, PSTDX US, PTOBX US, PSOCX US, DXRLX US, MWATX US
92
Petajisto, A. (2010)

38

terms of above average totals and below average. Four93
of the sixteen Funds showed
tracking errors off above the calculated average of 7.088, while the remaining twelve
totaled a tracking error of below the average. As discussed earlier the tracking error
is associated with the systematic risk measure of a Fund, which clearly is evident in
our sixteen mutual Funds in regards to their under/over-performance. A lower
tracking error suggests a closer movement with the benchmark94
(in this case the
S&P 500), in our sample twelve of the Funds closely move with the index while the
remaining four are less correlated to movements of the index, suggesting the obvious
of having higher systematic risk than the other Funds (refer to graph 67)
Graph 67
93
RYNCX US, DXRLX US, RYNAX US, RYNVX US
94
Articles.economictimes.indiatimes.com (2011)

39

D I S C U S S I O N
R e g u l a t i o n o r D e r e g u l a t i o n ?
Through the years, Acts and laws have been implemented and overwritten (or
appealed) continuously. The question that arises recurrently, is whether these
regulations deeply affect the financial sector or are they just merely temporarily
placed to impose a sense of safety to the public? As blunt as the assumption, the
answer is obscured by the constant turmoil in our financial sectors that seem to
posses an untamable character. Supporting a free trade and competitive environment
does come with a price, but does regulation have a major influence?
Throughout the aftermaths of the the Great Depression in 1929 laws have been set up
and later on the years repealed and made more lenient. Consequently, these lenient
laws start to be abused, thus causing another crisis which in turn built up more
stringent acts and laws. This profound cycle of regulation can be seen as a trend
throughout history, yet its true impact can not easily be foreseen.
The theory of business cycles have long been discussed, however what if we tried
and link regulation with them. Can one describe it as a regulation cycle that is
negatively related to a Bear or Bull market?
The Banking Act in 1933 or as it is refereed to as the Glass-Steagall Act was
imposed as a banking reform act following the disastrous 1929 US wall street crash.
The Act was enforced to regulate speculation and limit the affiliation of both
commercial banks and securities firms (Rooney, A. 2012). Then in 1999 the Gramm-
Leach-Bliley Act95
was formed to repeal the Glass-Steagall Act and ease market
barriers. The Act was described as a mean to “enhance competition in the financial
sector”96
As a result of the major outrage in corporate fraud cases in companies such as Enron,
Tyco International, Adelphia, Peregrine Systems and WorldCom, the Sarbanes Oxley
Act of 2002 was placed. The skepticism of public confidence in the markets was a
key factor in passing the Sarbanes Oxley Act, it however proved too strenuous
95
Broome, L. & Markham, J. (2001)
96
Bill Summary & Status 111th Congress (2009 - 2010) H.R.

40

during the 2007-2010 financial crisis. Criticism mounted up on the large barriers that
the Act praised, which caused IPO97
’s to drastically fall. In late 2008 Kralik and
Gingrich98
addressed the congress to repeal Sarbanes-Oxley for they believed the
lack of IPOs added in the unemployment level increasing99
Subsequently the Dodd Frank Act in 2010 repealed “the exemption from regulation
for security-based swaps under the Gramm-Leach-Bliley Act100
, which was enacted
after the Glass-Steagall Act of 1932. The Gramm-Leach-Bliley Act was much to be
blamed for the 2007 crisis101
, since it permitted investments banking firms to highly
trade on their depositors’ money102
.
Regulation forms the backbone of our financial society’s haven. The misuse and
undeniable excessive leverage combined with complex capital structures is merely a
few of the symptoms that overwhelm a corporation in excessive bull periods. The
role of regulatory constraints is therefore of utmost need to better restrain the
conflicted harm that will be inflicted by these high stakes.
M a j o r N e w R e g u l a t o r s
The Dodd-Frank Act made it extremely obvious which area of the financial sector it
will attack with the most rigorous restrictions. Money market Funds, specifically
institutional money market Funds are regarded as highly influential to systematic risk
thus will be highly integrated in the regulatory measures of the Act.103
The
introduction of the Financial Oversight Council and the Consumer Financial
Protection Bureau are key elements in the fight over improved transparency and
reform.
A crucial reform was the corporate governance provision104
of the Act. This clause
gives the SEC the authority to impose specific company’s with shareholders nominee
as director as well as the company’s own nominees, sent with a proxy before the
97
Initial Public Offerings
98
Newt Gingrich is the former speaker of the House of Representatives and general chairman, and David W.
Kralik is director of Internet strategy and manager of the Silicon Valley office of American Solutions.(from the
same article)
99
Gingrich, N. & Kralik, D. (2008)
100
The Dodd Frank Act; Section 762 of the Act, Sections 206B and 206C
101
Time.com (2010)
102
Search.usa.gov (2012)
103
Geffen, D. & Fleming, J. (2011)
104
Bainbridge, S. (2010) Section 951 - Section 989G

41

annual meeting. In addition it attains an unbinding vote on directors and top
executives compensation packages.105
The first procedure is called “proxy access”
which has caused an anxiety wave in directorial levels, as this has been seen as a way
to navigate power to shareholders to incorporate their own agenda’s106
. The act also
sheds light into credit rating reforms which were a main blame in the overestimation
of “Too Big to Fail” institutions.107
T h e C a s e A g a i n s t t h e D o d d - F r a n k A c t
Numerous negative strikes have been made against the Act, from its mere structural
reform to its quest against TBTF108
. The debate is managed by the fact of such
reform regulations being handled by the same agencies that did not stop excessive
leveraging in the past109
. In addition to not having adequate limitations on the growth
of “large Complex Financial institutions” through mergers and acquisitions. Political
influence in the scope of such vulnerable trading environment and the consistent
pressures to try and limit excessive trading and non transparent Fund activities are all
building up into demonstrative aspects of the Dodd Frank Act. The mass bailouts of
TBTF110
and their continued existence of financial assistance, sheds light on the fact
that the Dodd Frank Act may not prevent such drastic future rescues. 111
A major
controversial dilemma stems from the fact that the Acts writers were the same
individuals that comprised the past regulatory financial framework, thus decreases
the efficiency of the Acts advancement into the loopholes of the financial laws
(Wilmarth, A. 2009).
Wilmarth, A. (2009) also discusses the fact that both the Dodd Frank Act and the
Basel III rely on the similar capital and supervisory attributes that failed in the past
from preventing banking and thrift crisis (example the 1980’s and 2007 crashes).
Adding to the dependency of the Dodd Frank Act on the same federal regulatory
105
106
Skeel, D. (2010)
107
108
Too Big To Fail
109
Wilmarth, A. (2009)
110
Too Big To fail
111
Wilmarth, A. (2009)

42

agencies112
that failed to stop the toxic leverage levels that had escalated during the
Bull period leading up to the crisis.
R i s k V e r s u s R e t u r n P a y o f f
A statement with extreme perception in the world of finance is that “high risks equal
high return”. The abundant link between risk and potential profitable returns has
resulted in accumulated fortune as well as adequate loss through specific market
situations. This perception is ruled by several factors; (1) the liquidity (both liquidity
needs and availability), (2) elasticity of the stock or Fund and (3) correlation
measures among asset classes. The risk/reward profile for complex trading strategies
differs immensely from more traditional investments, which in turn differs the
repercussions of systematic risk available 113
. During the disastrous downfall of
LTCM114
as well as the Russian Government debt default in 1998115
.The default of
large capitalized Funds as well as large countries such as Russia created a rippled
affect throughout the worlds economy causing a distressful economic and political
time. The stress on international markets in turn produces substantial entities to
puncture the financial system causing a hole of evident despair, in turn, disabling the
natural flow of the market.116
A number of themes arise that vocalize important
aspects of our study in assessing just how much risk can escalate returns as well as
major reductions in those returns in times of a Bear market. The main theme of
emphasis is the liquidity and leverage interrelated precessions, as well as the
“capriciousness” in correlation, specifically, between instruments and portfolios that
are presumed to be uncorrelated (Chan, N. et al. 2005). Concluding the implications
in hand due to specific trading strategies and certain risk exposures, it is of utmost
importance to attempt and study the extend of excess leverage undermining Fund
return.
S y s t e m a t i c R i s k I m p a c t o n F u n d P e r f o r m a n c e s
A crucial scenario during and post 2007 crisis was the way in which systematic risk
needed to be attenuated. Risk in Funds is collaborated with numerous aspects such
112
Federal Reserve, Securities and Exchange Commission
113
Stowell, D. (2010)
114
Long Term Capital Management
115
Nash, R. (2011)
116
Chan, N. et al. (2005)

43

as; (1) bank lending strategies, (2) Fund leverage and diversification in investment,
(3) better regulation on speculative Funds.117
During the aftermaths of the 2007
crisis, banks were pressured into more conservative lending strategies, the decrease
in liquidity and hype in the demand for cash were only some of the problems
associated with more aggressive lending approaches. The US mortgage and real
estate bubble crash was only the beginning. The second aspect is in the decrease of
Fund leverage levels and increased diversification in investment activities. A
downsize in leverage usual means that the Funds do not gear in increased returns
than when they were higher leveraged. Thirdly, the emphasis on regulation to better
steer the scope on past opaqueness in Funds has its positive attributes in better
transparency and future financial stability. However, excess regulation levels has its
downside side as well, as Stowell, D. (2010) proclaims “if regulation becomes too
burdensome, some of the liquidity in Funds may evaporate”. The decrease in a
Funds’ liquidity has precision on the sources of capital that is in need when capital
markets are restrained (Stowell, D. 2010). A key concept derived form the mentioned
three points is the amount of regulation that needs to be appropriately measured in
order to refrain from interrupting a Funds liquidity providers as this may aggravate
systematic risk.
I m p a c t o f t h e A c t o n F u n d M a n a g e r s a n d I n v e s t o r s
Mutual Fund managers are in constant competition against the stated benchmark of
their Funds and is one of the core elements in performance evaluation and manager
reimbursements118
. The attractiveness and popularity in actively traded Mutual Funds
is of essential interest to investors. The daily trading gears in benefits from
combining both index repetition as well as a daily price exchange in the sense of the
NAV119
of a Fund. In accordance with Kosowski, R. (2006) US domiciled mutual
Funds performed better in times of recession. Our results have affirmed that 31.25%
of the Funds have under performed in times of a Bear market and the implementation
of the Act. The low percentage seen here translates to the impact of The Act on past
117
Stowell, D. (2010)
118
Maspero, D. & Saita, F. (2002)
119
Net Asset Value

44

studies that do not seem to hold much grounded value in the new financial landscape
post Dodd Frank Act.
Past registration exemptions under the Investment Advisors Act of 1940 are now
replaced by the Dodd-Frank Act of 2010 requirements to register with the SEC120
.
This sets a new framework for mangers that limits their past opaqueness and aims to
increase monitoring on Fund activities to a more transparent environment. This
affects Fund managers past escalated leveraging and risk levels thus in turn limits
their former speculative and aggressive profit maximization methods.
The Act also enforces new “record keeping and reporting obligations”121
. The
purpose of such stringent recording is a way to monitor “potential” systematic risk
(Kay Scholer LLP 2010), this also adds to a Funds expenses which are inclined to
increase Fund costs paid by the investors. Under the Volcker Rule, investment banks
are inclined to adhere to criteria such as capital requirements and ownership interest
in Funds.122
This affects the Funds future capital fundraising attempts and minimizes
the leveraging needed to surpass the profit target.
120
U.S. Securities and Exchange Commission
121
Kay Scholer LLP (2010)
122
Kay Scholer LLP (2010)

45

C O N C L U S I O N
In conclusion the implications and loopholes in past regulatory measures did not
guard the financial world from the 2007/2008 crisis, therefore The Dodd Frank Act
was promoted and passed to ensure financial stability and transparency in
transactions. In an attempt to end the abusive services that were undergone in the
past and to eliminate any threat to the financial and banking system of the United
States, strenuous regulatory constraints were placed.
The registration of all Funds irrelevant of their size and investor levels was a way to
promote fair and subjective investor grounds. Fund registration was also a mean to
limit risk and previous opaqueness towards Funds, as well as limit damages of the
failing larger institutions. The prohibition of proprietary trading on behalf of banks
enabled a safe guard to investors, as means to decrease the abusive lending practices
and to rein against “Too Big to Fail” institutes that had cost the US government
enormous bailout bills. As previously mentioned by Wilmarth, A (2009) the reform
regulations being presently handled are done so by the same agencies that had failed
previously in controlling excessive leverage levels. Therefore both the regulatory
writers and some risk measures such as the VAR123
are skeptical and highly
debatable. The increased shockwave of investor mistrust is the result of the
underestimation of risk in the 2007/2008 crisis due to but not limited to the VAR and
its influence on toxic and complex leverage development.
Mutual Funds are acclimatized to systematic risk by their actively traded status and
leveraged approaches in the market. As the new regulatory measures have hindered
the direction of market inefficiencies by restricting dynamic trading strategies, thus
impacting Fund returns. During the first analysis period (30/12/02-30/12/2007); 56%
of the Funds showed lower returns and 44% averaged or slightly above the stated
average. There was however 1 Fund outlier (Fund 7 ‘DXRLX’) which had
significantly higher volatility, all due to its aggressive derivative trading strategy. A
number of Crashes however have had crippled these Funds in its early development
stages in 2002, such as; the internet bubble burst, the September 11 attacks, and the
collapse of Enron. This sent a wave of increased volatility levels through the Funds.
123
Value at Risk

46

A key concept needs to be addressed in the difference between the 2002 crisis and
the 2007 which is an immense increase in regulatory measures that did not occur in
2002.
A noticeable relationship between Fund inception date and the volatility levels has
been found; Funds with inceptions dates between 1993-2001 showed high volatility
in 2001/2002, while Funds that were incepted in 2002 had higher volatility levels in
2007/2008. In addition to a noticeable decrease in volatility levels of 20%, 30% and
50% prior to any of the crashes124
articulating the sensitivity in Funds due to market
situations as well as the regulatory impacts post Dodd Frank Act. Regulation may
have an impact, however it is not the only nor core factor that influences risk and
return, the benchmark that the Funds are compared to (SPX125
) and its overall
performance can be seen as a major player in navigating volatility as well as
performance levels. Where high tides and Bull markets gear in higher returns and
lower volatility, yet its Bear market can cause catastrophic losses due to the leverage
levels and a higher spike in volatility levels.
During the second analysis period (01/01/2008-30/12/2011); 18.7% of the Funds
geared in positive returns while 81.25% showed negative returns. Fund 7 ‘DXRLX’
was again an outlier with higher volatility levels (an increase of 28 points). An
observed payoff between risk and return concluded mixed results, where some
showed increase returns and others a decrease in return levels with the same risk
levels. This is associated with each Funds diversification, and fixed income risk
mitigated approach. Emphasizing the weak correlation between risk and Fund
maturity with the return and factors of influence. As the Dodd Frank Act was applied
and regulated specifically on derivatives and OTC126
instruments a drop of 70 points
in volatility during 2010 and 2011 were recorded, the lowest recorded levels
articulating the restrictive environment that the Funds were adjusting to and
deleveraging of their past excessive leverage levels. During the second analysis
period vast fluctuations in risk levels were present from a decrease of 98 to increases
124
2002 crash and 2007
125
S&P500
126
Over The Counter

47

of 178 points127
, in addition the highest volatility levels that where recorded in 2008
while the lowest recorded in 2011 . This clearly shows how the Act has influenced
market activity specifically for Mutual Funds.
Collaborating both analysis periods (30/12/2002-30/12/2011) to give a concluding
overall analysis we have come to observe that 62.5% of the Funds have had above
average returns, Fund 7 “DXLRX US” had the highest volatility level of about
double the rest of the Funds in 2008, as well as Funds 6 “RYNCX US”, 8 “RYNAX
US” and 15” RYNVX US”. In 2006 however all Funds were inline with the
remaining Funds in volatility levels, articulating the role of derivatives in Fund
trading strategy and their correlation.
The risk determinants in Mutual Funds that were looked at in depth were Alpha,
Beta, R-Squared, Standard Deviation and Tracking Error. In scope of performance
analysis tracking indicators for the data range 28/06/2002-31/05/2012 and the Funds
performance against the S&P500, the following results have been calculated. Alpha,
as the risk adjusted performance of the Fund as a measure of its volatility in
comparison to the index, if all the Funds were in a single portfolio they would have
underperformed the S&P500 by 1.514%. During a Bull market 43.75% of the Funds
out performed the index. However during a Bear market 68.75% of the Funds had
outperformed the index while the remaining 31.25% of the Funds had
underperformed (negative alpha). Thus we arise to the conclusion that risk
adjustment and excess return are negatively correlated in time of a declining market.
Beta, which is a measure of systematic risk to the Funds volatility and correlation to
market swing. All Funds showed a positive Beta thus articulating their sensitive to
the market and changes in price levels. Six Funds ‘PSPTX US, PTOAX US, PSTDX
US, PTOBX US, PSOCX US, RYNCX US’ showed high volatility levels in a Bull
market, however reflected lower volatility in a Bear market. The remaining ten
Funds ‘DXRLX US, RYNAX US, MWATX US, PSPDX US, PSPAX US, PSPCX
US, PSPBX US, PPLAX US, RYNVX US, PSTKX US’ had an opposite effect
where their volatility levels in a Bull market were low in comparison to their higher
levels in a Bear market. This clearly shows the concentrated trading strategy due to
127
Lowest to highest recorded volatility levels

48

high derivative levels by the first group, and how the Act has restricted excessive
leverage in derivatives as a mean to leverage in an off-balance sheet approach. This
strategy can be overseen in high return periods, but apparent in lower return periods
which is the case in this study.
With regards to R-Squared, which is the statistical measure of mutual Funds
correlation or movement with regards to the benchmarked index (SPX)128
. All the
sixteen Funds showed low numbers in a Bull market and higher numbers in a Bear
market, this translates to high correlation values with the index in a declining market
environment and a low correlation in a rising market. The Tracking Error which
measures a Funds excess volatility in comparison to the benchmark, in addition to
tracking the percentage change in standard deviation and differential return
(systematic risk measure of Fund). The analysis has shown a correlation between the
Funds Beta and Tracking Error where 75% of the Funds move closely with the
index, while 35% have a lower correlation to index as well as higher systematic risk
(refer to graph 68). Deriving from our study the impact of The Dodd Frank Act on
Mutual Fund performances, we have reached the conclusion that regulation does
have an impact on Fund performances, however it is not the sole responsible element
for the decrease in Fund returns. As the decrease in available leveraging freedom in
Funds has hindered profit maximization of Funds past strategies, a negative
relationship is observed with regards to past performances and adjustments in Funds
risk levels. In addition to the alteration in asymmetric information and the
microstructure regulation of capital markets, which has concluded a positive
relationship with Funds return and overall performance levels.
Graph 68
128
S&P500

49

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