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Why do Funds Make More When They Trade More?

Author

Listed:
  • Jaden Jonghyuk Kim

    (International Monetary Fund, 700 19th Street NW, Washington, DC 20431, USA)

  • Jung Hoon Lee

    (Owen Graduate School of Management, Vanderbilt University, 401 21st Ave S, Nashville, TN 37203, USA)

  • Shyam Venkatesan

    (Ivey Business School, University of Western Ontario, 1255 Western Rd, London, ON N6G 0N1, Canada)

Abstract

In this paper, we introduce a conditional measure of skill, the correlation between funds’ residual trades, net of common trading motives, and future news about the stocks traded. Using this measure, we show that the average mutual fund manager in the cross-section has stock-picking skill. This result is robust to different benchmarks and is mainly driven by the manager’s ability to predict a firm’s cash-flow news. This skill has short-term persistence and is distinctly related to traditional measures of performance. Importantly, consistent with Berk and Green [2004, Mutual Fund Flows and Performance in Rational Markets, Journal of Political Economy 112(6), 1269–1295] fund flows are increasing with respect to managerial skill after controlling for fund performance.

Suggested Citation

  • Jaden Jonghyuk Kim & Jung Hoon Lee & Shyam Venkatesan, 2022. "Why do Funds Make More When They Trade More?," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 12(04), pages 1-52, December.
    • Handle: RePEc:wsi:qjfxxx:v:12:y:2022:i:04:n:s2010139222500148
    DOI: 10.1142/S2010139222500148
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    Keywords

    Mutual fund; performance; skill;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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