On the Style-Based Feedback Trading of Mutual Fund Managers

Abstract

This paper examines the style-based feedback trading behavior of mutual fund managers. We provide an empirical version of the model for style-switching behavior of Barberis and Shleifer (2003). We find style-based feedback trading for 77% of the funds, half of which is positive- (negative-) feedback trading. There is evidence for “twin-style” switching, in which capital is channeled between value and growth, and between large-cap and small-cap. Growth (value) funds apply more positive (negative)-feedback trading. Funds that switch more aggressively are younger and have higher expense ratios. Finally, we find that positive (negative) feedback trading yields positive (negative) alpha.

Keywords: Mutual Fund Managers, Style Switching, Feedback Trading

JEL Classification: C22, C58, G11