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Why Mutual Funds 'Underperform'

Vincent Glode

University of Pennsylvania - The Wharton School

April 21, 2010

Journal of Financial Economics, 2011

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.

Number of Pages in PDF File: 41

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

JEL Classification: G23, G12, G11

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Date posted: April 18, 2008 ; Last revised: December 7, 2011

Suggested Citation

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

Contact Information

Vincent Glode (Contact Author)
University of Pennsylvania - The Wharton School ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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