Hoepner, Andreas and Stefan Zeume. "The Dark Enemy of Responsible Investment: Are vicious fund managers market wizards or investment desperados?" Working Paper, University of St. Andrews, 2009.

This study further explores the question of sin stock returns, following studies by Hong and Kacperczyk (2006), Statman and Glushkov (2008), and Fabozzi and Oliphant (2008) demonstrating superior returns for vice stocks (those involved in, for example, tobacco, alcohol, and gambling).

The paper evaluates the investment performance of The Vice Fund, which "disapproves ESG criteria by concentrating its commitment to 80% equity investment predominantly on U.S. alcohol, aerospace, defence, gambling, and tobacco stocks." The only other study to review this fund, Chong et al (2005), found positive abnormal returns, a finding the authors of the present study dispute. The analysis uses the same time period as Chong et al (9/2002 - 9/2005) but also extends the analysis through 2008, roughly doubling the sample size.

The analysis follows three steps:
  1. The fund's performance superior nominal performance is evaluated using various risk models, including Fama & French (three factor), Carhart (four factor), and Jensen. Jensen's alpha for the full time period was 1.55% (t=1.19). Fama & French alpha was 1.13% (t=0.90), Carhart alpha was 0.94% (t=0.8).
  2. The models described above are extended to "appropriately incorporate the legal, especially taxation related, risk, which sufficiently explains tobacco stocks’ significantly positive abnormal return in Salaber’s (2009) study." The authors find that "we observe the Vice Fund to have unsurprisingly a highly significant exposure to tobacco stocks' excess legal risk...none of our legal risk adjusted models over both sample periods indicates a significant positive abnormal return of the Vice Fund."
  3. Further analysis tests "the Vice Fund managers’ asset management skills by incorporating the market timing skill tests developed by Henriksson and Merton (1981) and Pfleiderer and Bhattacharya (1983)12 as well as the crisis management and directional trading skill tests recently suggested by Hoepner and Zeume (2009) in our abnormal return estimation models." This portion of the study argues that the manager's trading skills are deficient in various ways.