Abstract

http://ssrn.com/abstract=2132366
 


 



Should We Expect Skilled Managers to Be Stars? (Dis)Incentive Effects of Fund Flows in Money Management


Juan M. Sotes-Paladino


University of Melbourne - Department of Finance

January 28, 2015


Abstract:     
I present a dynamic investment model in which mutual funds' inferior performance is an equilibrium response to incentives rather than the consequence of low skills. In the model, a skilled (informed) manager responds to investors' flows, which are a convex function of performance relative to lesser-informed peers. The manager shifts risk in certain situations but herds with her peers in most other situations. While risk shifting exacerbates portfolio risk, herding leads to low excess returns. The resulting policy is overly conservative and hurts risk-adjusted performance. I present evidence consistent with the model over a sample of U.S. mutual funds.

Number of Pages in PDF File: 63

Keywords: Portfolio delegation, mutual funds, incomplete information, fund flows, herding, performance evaluation

JEL Classification: D82, D83, G11, G23


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Date posted: August 20, 2012 ; Last revised: January 29, 2015

Suggested Citation

Sotes-Paladino, Juan M., Should We Expect Skilled Managers to Be Stars? (Dis)Incentive Effects of Fund Flows in Money Management (January 28, 2015). Available at SSRN: http://ssrn.com/abstract=2132366 or http://dx.doi.org/10.2139/ssrn.2132366

Contact Information

Juan M. Sotes-Paladino (Contact Author)
University of Melbourne - Department of Finance ( email )
Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia
+61 3 9035 9827 (Phone)
+61 3834 6914 (Fax)
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