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Mutual Fund Performance and the Incentive to Generate Alpha

Author

Listed:
  • DIANE DEL GUERCIO
  • JONATHAN REUTER

Abstract

type="main"> To rationalize the well-known underperformance of the average actively managed mutual fund, we exploit the fact that retail funds in different market segments compete for different types of investors. Within the segment of funds marketed directly to retail investors, we show that flows chase risk-adjusted returns, and that funds respond by investing more in active management. Importantly, within this direct-sold segment, we find no evidence that actively managed funds underperform index funds. In contrast, we show that actively managed funds sold through brokers face a weaker incentive to generate alpha and significantly underperform index funds.

Suggested Citation

  • Diane Del Guercio & Jonathan Reuter, 2014. "Mutual Fund Performance and the Incentive to Generate Alpha," Journal of Finance, American Finance Association, vol. 69(4), pages 1673-1704, August.
    • Handle: RePEc:bla:jfinan:v:69:y:2014:i:4:p:1673-1704
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    File URL: http://hdl.handle.net/10.1111/jofi.12048
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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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