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Why mutual funds "underperform"

  • Glode, Vincent

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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