50 Pages Posted: 17 Mar 2012 Last revised: 30 Mar 2017
Date Written: March 27, 2017
This paper characterizes the optimal risk-taking strategies of mutual fund managers competing in multi-period winner-take-all tournaments. With competition among mutual funds, every fund begins by taking maximum risk. In the final period, all funds continue to take maximum risk except possibly the leading fund, which plays a “lock-in” strategy only if the size of the lead is great enough. Contrary to the standard result, our prediction implies risk reduction by the leader to strategically lock in, rather than increasing risk by the trailers to catch up. We provide supportive empirical evidence, which is robust to alternate specifications.
Keywords: tournaments, mutual funds, risk
JEL Classification: G23, G11
Suggested Citation: Suggested Citation
Chen, Joseph and Hughson, Eric N. and Stoughton, Neal, Strategic Mutual Fund Tournaments (March 27, 2017). Available at SSRN: https://ssrn.com/abstract=2023805 or http://dx.doi.org/10.2139/ssrn.2023805