Working Paper: CEPR ID: DP13111
Authors: Julien Cujean
Abstract: I develop an equilibrium model to explain why few mutual fund managers consistently outperform, even though many have strong informational advantages. The key ingredient is that managers obtain investment ideas through idea sharing. Idea sharing improves statistical signi ficance of alpha through increased price informativeness. But it also causes better informed managers to take larger positions, which makes their alpha noisier although a signi ficant fraction of managers build strong informational advantages, statistical signi ficance and persistence of alpha concentrate in underperforming funds. I argue that in-house development of ideas cannot explain these facts.
Keywords: idea sharing; performance; rational expectations; equilibrium
JEL Codes: D82; D83; D85; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| idea sharing (O36) | statistical significance of alpha (C12) |
| idea sharing (O36) | price informativeness (G14) |
| better-informed managers (D83) | larger positions (G19) |
| larger positions (G19) | noisier alpha (Y70) |
| statistical significance of alpha (C12) | persistence of performance (L15) |
| idea sharing (O36) | performance outcomes (L25) |
| in-house development of ideas (O36) | performance patterns (J29) |