Happy Losers: Subcontracting in International Asset Management

Posted: 18 Mar 2011 Last revised: 10 Mar 2014

See all articles by Oleg Chuprinin

Oleg Chuprinin

UNSW; Financial Research Network (FIRN)

Massimo Massa

INSEAD - Finance

David Schumacher

McGill University

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2011


We study international outsourcing in the asset management industry. We argue that subcontractor management companies use the funds they manage on behalf of third parties to subsidize their own inhouse funds. On average, inhouse funds outperform the outsourced funds by 7.5 basis points per month. We attribute this difference in performance to within-company subsidization and identify risk-taking as the main source of the observed performance differentials. Portfolios of inhouse funds are 5-8% more illiquid, load 5% more on the market factor, and score consistently higher in the within-style tournament. Inhouse funds engage in performance-improving cross-trading with affiliated outsourced funds. The trades between inhouse and outsourced funds of the same company are more illiquid than outside trades. Inhouse funds use outsourced funds as insurance at the time of distress; a one standard deviation increase in the fraction of outsourced funds managed by the same company mitigates the negative performance impact of large outflows of an inhouse fund by up to 30%. However, outsourcing families still benefit from outsourcing even after subsidization. We endogenize the outsourcing decision and we see that, via outsourcing, fund families mitigate the negative effects of being located far away and improve expected return by 31.2 bp a month on average. This suggests that outsourcing is used as a means of overcoming segmented equity markets.

Keywords: Mutual funds, Performance, Subcontracting, International Markets

JEL Classification: G15, G23, G30, G32

Suggested Citation

Chuprinin, Oleg and Massa, Massimo and Schumacher, David, Happy Losers: Subcontracting in International Asset Management (March 1, 2011). Available at SSRN: https://ssrn.com/abstract=1785269

Oleg Chuprinin

UNSW ( email )

Room 349, UNSW Business School
High St
UNSW Sydney, NSW 2052
406674419 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

David Schumacher (Contact Author)

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
5143984778 (Phone)

HOME PAGE: http://www.davidschumacher.info

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