Strategic Mutual Fund Tournaments

Abstract:     
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

working papers series