Strategic Mutual Fund Tournaments

61 Pages Posted: 17 Mar 2012 Last revised: 13 May 2018

See all articles by Joseph Chen

Joseph Chen

University of California, Davis - Graduate School of Management

Eric N. Hughson

Claremont McKenna College - Robert Day School of Economics and Finance

Neal Stoughton

Vienna University of Economics and Business; Vienna Graduate School of Finance (VGSF)

Date Written: May 9, 2018

Abstract

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 but only when the magnitude of the lead is great enough. Contrary to the standard result, our prediction implies that we should observe a reduction in risk-taking by the leader to strategically lock in the advantage, rather than an increase in risk-taking by the trailers to try 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

Chen, Joseph S. and Hughson, Eric N. and Stoughton, Neal M., Strategic Mutual Fund Tournaments (May 9, 2018). Available at SSRN: https://ssrn.com/abstract=2023805 or http://dx.doi.org/10.2139/ssrn.2023805

Joseph S. Chen

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
(530) 752-7155 (Phone)
(530) 752-2924 (Fax)

Eric N. Hughson

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
909-607-3664 (Phone)

Neal M. Stoughton (Contact Author)

Vienna University of Economics and Business ( email )

Austria

Vienna Graduate School of Finance (VGSF) ( email )

Austria

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