Better than the Original? The Relative Success of Copycat Funds

Abstract

We construct hypothetical copycat funds to investigate the performance of free-riding strategies that duplicate the disclosed asset holdings of actively managed mutual funds. On average, copycat funds are able to marginally outperform their target mutual funds, but their relative success has increased after 2004, when SEC regulation imposed all mutual funds to quarterly disclose their holdings. We find a substantial cross-sectional dispersion in the relative performance of copycat funds. Free-riding on the portfolios disclosed by past winning funds and the funds that disclose representative holdings generates significantly better performance net of trading costs and expenses than the vast majority of mutual funds. The results indicate that free-riding on disclosed fund holdings is an attractive strategy and suggest that mutual funds can suffer from information disclosure requirements.

Keywords: Mutual Funds, Portfolio Disclosure, Copycat Funds, Relative Performance, SEC

JEL Classification: G11, G23, G28