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Why mutual funds "underperform"

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  • Glode, Vincent

Abstract

I propose a parsimonious model that reproduces the negative risk-adjusted performance of actively managed equity mutual funds. In the model, a fund manager can generate state-dependent active returns at a disutility. Negative expected performance and mutual fund investing simultaneously arise in equilibrium because the active return the fund manager generates covaries positively with a component of the pricing kernel that the performance measure omits, consistent with recent empirical evidence. Using data on U.S. funds, I also document new empirical evidence consistent with the model's cross-sectional implications.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 99 (2011)
Issue (Month): 3 (March)
Pages: 546-559

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Handle: RePEc:eee:jfinec:v:99:y:2011:i:3:p:546-559

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Mutual fund Performance Business cycle Investment Pricing kernel;

References

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Citations

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Cited by:
  1. Péter Kondor & Ron Kaniel, 2011. "The delegated Lucas tree," 2011 Meeting Papers 580, Society for Economic Dynamics.
  2. Diane Del Guercio & Jonathan Reuter, 2011. "Mutual Fund Performance and the Incentive to Generate Alpha," NBER Working Papers 17491, National Bureau of Economic Research, Inc.
  3. Pástor, Luboš & Stambaugh, Robert F., 2010. "On the Size of the Active Management Industry," CEPR Discussion Papers 7637, C.E.P.R. Discussion Papers.
  4. Ling, Aifan & Sun, Jie & Yang, Xiaoguang, 2014. "Robust tracking error portfolio selection with worst-case downside risk measures," Journal of Economic Dynamics and Control, Elsevier, vol. 39(C), pages 178-207.
  5. Laura Veldkamp, 2012. "Time-varying fund manager skill," 2012 Meeting Papers 68, Society for Economic Dynamics.
  6. Diane Del Guercio & Jonathan Reuter & Paula A. Tkac, 2010. "Broker Incentives and Mutual Fund Market Segmentation," NBER Working Papers 16312, National Bureau of Economic Research, Inc.
  7. Mamatzakis, E & Babalos, Vassilios & filipas, n, 2013. "Fund Performance Evaluation in Greece Revisited: Evidence from the Impact of Operational Attributes," MPRA Paper 51640, University Library of Munich, Germany.

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