Working Paper: CEPR ID: DP3504
Authors: Gyngyi Lrnth; Emanuela Sciubba
Abstract: This Paper constitutes a first attempt to analyse the impact of the emergence of new funds on portfolio decisions of mutual fund managers who are evaluated on the basis of relative performance. Recent theoretical literature has pointed to the inefficiencies in portfolio selection caused by relative performance evaluation of fund managers. We find that the ongoing process of creation of new funds, by posing an entry threat to the incumbent fund managers, greatly alleviates these inefficiencies. Hence the transitory market structure that characterizes the mutual fund industry could explain why relative performance evaluation is widely in use.
Keywords: Family of Funds; Fund Management; Industry Ranking; Objectives; Relative Performance Evaluation
JEL Codes: G11; G24; L10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Emergence of new mutual funds (G23) | Portfolio decisions of existing fund managers (G11) |
| Entry threat from new funds (G23) | Alleviation of inefficiencies in portfolio selection (G11) |
| Entry threat from new funds (G23) | Performance outcomes for existing managers (L25) |