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Is the active fund management industry concentrated enough?

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  • Feldman, David
  • Saxena, Konark
  • Xu, Jingrui

Abstract

We introduce a theoretical model of the active fund management industry (AFMI) in which performance and size depend on the AFMI's competitiveness (concentration). Under plausible assumptions, as AFMI's concentration decreases, so do fund managers’ incentives for exerting effort in search of alpha. Consequently, managers produce lower gross alpha, and rational investors, inferring lower expected AFMI performance, allocate a smaller portion of their wealth to active funds. Empirically, we find that a decrease in the US mutual fund industry concentration over our sample period is associated with a decrease in its net alpha and size (relative to stock market capitalization).

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  • Feldman, David & Saxena, Konark & Xu, Jingrui, 2020. "Is the active fund management industry concentrated enough?," Journal of Financial Economics, Elsevier, vol. 136(1), pages 23-43.
    • Handle: RePEc:eee:jfinec:v:136:y:2020:i:1:p:23-43
    DOI: 10.1016/j.jfineco.2019.08.009
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    More about this item

    Keywords

    Active fund management; Market concentration; Effort; Industry size; Alpha;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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