Strategic Mutual Fund Tournaments
University of California, Davis - Graduate School of Management
Eric N. Hughson
Claremont Colleges - Robert Day School of Economics and Finance
Vienna University of Economics and Business Administration; Vienna Graduate School of Finance (VGSF)
October 1, 2012
This paper characterizes the optimal strategies of mutual fund managers competing in a multi-period winner-take-all tournament. Taking account of both multiple periods and competition between more than two managers, the optimal strategies are contingent on the state at the interim date. In the final period all managers maximize the amount of risk that they add to their portfolios with the exception of the leading fund. This fund locks in its advantage by reducing risk only if it has a sufficiently large lead. Empirically, we find that consistent with the theory, funds with larger leads decrease risk; however trailing funds do not increase risks. These results are robust to using different ways of controlling for systematic risk exposures.
Number of Pages in PDF File: 40
Keywords: tournaments, mutual funds, risk
JEL Classification: G23, G11
Date posted: March 17, 2012 ; Last revised: October 24, 2012
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