Mutual Fund Performance and the Incentive to Generate Alpha

74 Pages Posted: 30 Sep 2011 Last revised: 17 Aug 2012

See all articles by Diane Del Guercio

Diane Del Guercio

University of Oregon, Lundquist College of Business; European Corporate Governance Institute (ECGI)

Jonathan Reuter

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: August 14, 2012

Abstract

To rationalize the well-known underperformance of the average actively managed mutual fund, we exploit the fact that retail funds in different market segments compete for different types of investors. Within the segment of funds marketed directly to retail investors, we show that flows chase risk-adjusted returns, and that funds respond by investing more in active management. Importantly, within this direct-sold segment, we find no evidence that actively managed funds underperform index funds. In contrast, we show that actively managed funds sold through brokers face a weaker incentive to generate alpha, and significantly underperform index funds.

Keywords: active management, index funds, investor heterogeneity, market segmentation, flow-performance

JEL Classification: G23, G14

Suggested Citation

Del Guercio, Diane and Reuter, Jonathan, Mutual Fund Performance and the Incentive to Generate Alpha (August 14, 2012). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1935109 or http://dx.doi.org/10.2139/ssrn.1935109

Diane Del Guercio

University of Oregon, Lundquist College of Business ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
541-346-5179 (Phone)
541-346-3341 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Jonathan Reuter (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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