Do Mutual Funds Outperform During Recessions? International (Counter-) Evidence
57 Pages Posted: 19 Sep 2014 Last revised: 6 Apr 2021
Date Written: May 29, 2015
Recent academic research predicts that (i) equity mutual funds have a systematically better performance during periods of economic downturn and (ii) investors are willing to pay high fees for funds that provide recession insurance. In this paper, we test these hypotheses using international fund data from 16 different countries. Surprisingly, we obtain contrary results: Mutual funds underperform by a statistically significant -0.4% during months of economic downturn and funds with high recession alphas charge low fees to investors. We provide evidence that recession underperformance can be explained by fund managers' forced trading in an illiquid market environment.
Keywords: International Mutual Fund Performance, Mutual Funds, Recession
JEL Classification: F30, G01, G11, G15, G23
Suggested Citation: Suggested Citation