Why Mutual Funds 'Underperform'

41 Pages Posted: 18 Apr 2008 Last revised: 7 Dec 2011

See all articles by Vincent Glode

Vincent Glode

University of Pennsylvania - The Wharton School

Date Written: April 21, 2010


I propose a parsimonious model that reproduces the negative risk-adjusted performance of actively managed mutual funds and the funds' high abnormal performance realized in bad states of the economy. In the model, a fund manager can generate state-dependent active returns at a disutility. Negative expected performance and mutual fund investing simultaneously arise in equilibrium because the fund's optimal active return covaries positively with a component of the pricing kernel that the performance measure omits. Using data on U.S. funds, I document empirical evidence consistent with the model's cross-sectional implications.

Keywords: Mutual Fund, Performance, Pricing Kernel, Business Cycle

JEL Classification: G23, G12, G11

Suggested Citation

Glode, Vincent, Why Mutual Funds 'Underperform' (April 21, 2010). Journal of Financial Economics, 2011, Available at SSRN: https://ssrn.com/abstract=1121436

Vincent Glode (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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