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Scale and Skill in Active Management

Listed author(s):
  • Lubos Pastor

    (University of Chicago Booth School of Business)

  • Robert F. Stambaugh

    ()

    (The Wharton School of the University of Pennsyvlania)

  • Lucian A. Taylor

    ()

We empirically analyze the nature of returns to scale in active mutual fund management. We find strong evidence of decreasing returns at the industry level: As the size of the active mutual fund industry increases, a fund’s ability to out- perform passive benchmarks declines. At the fund level, all methods considered indicate decreasing returns, but estimates that avoid econometric biases are in- significant. We also find that the active management industry has become more skilled over time. This upward trend in skill coincides with industry growth, which precludes the skill improvement from boosting fund performance. Finally, we find that performance deteriorates over a typical fund’s lifetime. This result can also be explained by industry-level decreasing returns to scale. Â

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File URL: http://econresearch.uchicago.edu/sites/econresearch.uchicago.edu/files/BFI_2014-03.pdf
File Function: First Version, 2014
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Paper provided by Becker Friedman Institute for Research In Economics in its series Working Papers with number 2014-003.

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Date of creation: 2014
Handle: RePEc:bfi:wpaper:2014-003
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