Does Fund Size Erode Performance? Liquidity, Organizational Diseconomies and Active Money Management
University of California, Davis - Graduate School of Management
Harrison G. Hong
Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)
Cornell University - Samuel Curtis Johnson Graduate School of Management
Jeffrey D. Kubik
Syracuse University - Department of Economics
We investigate the effect of fund size on performance among active mutual funds. We first document that fund returns, both before and after management fees, decline with fund size, even after adjusting performance by various benchmarks and controlling for other fund characteristics such as turnover and age. We then explore a number of potential explanations for this relationship. We find that the effect of fund size on fund returns is most pronounced among funds that play small cap stocks. Interestingly, performance only depends on fund size and does not decline with family size. Finally, small funds are better than large ones at investing in local companies. We argue that these findings are consistent with both liquidity and organizational diseconomies being important factors behind the documented diseconomies of scale in money management.
Number of Pages in PDF File: 44
Date posted: June 20, 2003
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