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Financial Product Differentiation over the State Space in the Mutual Fund Industry

Author

Listed:
  • Shujing Li

    (China Securities Regulatory Commission, Xi Cheng District Beijing 100033, Beijing, China)

  • Jiaping Qiu

    (DeGroote School of Business, McMaster University, Hamilton, Ontario L8S 4M4, Canada)

Abstract

By distancing themselves from others in risk factor loadings, mutual funds yield distinct returns and become better-performing funds in different market situations. This enables mutual funds to obtain stochastic market power and charge higher fees than they could otherwise. This strategy fundamentally differs from the conventional market segmentation strategy that targets investors with heterogeneous preferences. We present a model to study this novel form of financial product differentiation over the states of nature. Empirically, we find that the return attributable to risk factor loadings has a significant impact on a fund's market share. Fund fees are related to the positions of their factor loadings in the industry and funds with more extreme risk factor loadings charge higher fees. This paper was accepted by Wei Jiang, finance.

Suggested Citation

  • Shujing Li & Jiaping Qiu, 2014. "Financial Product Differentiation over the State Space in the Mutual Fund Industry," Management Science, INFORMS, vol. 60(2), pages 508-520, February.
    • Handle: RePEc:inm:ormnsc:v:60:y:2014:i:2:p:508-520
    DOI: 10.1287/mnsc.2013.1779
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    References listed on IDEAS

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    3. Ryan, Ellen, 2022. "Are fund managers rewarded for taking cyclical risks?," Working Paper Series 2652, European Central Bank.
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    5. Li, Yumin & Li, Shiyuan & Li, Guodong & Liu, Minquan, 2020. "Low-Carbon Incentives and the Diffusion for New Energy Vehicles: Evidence from Shanghai," MPRA Paper 110970, University Library of Munich, Germany.

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