Do Funds Make More When They Trade More?
48 Pages Posted: 24 Nov 2014
There are 4 versions of this paper
Do Funds Make More When They Trade More?
Do Funds Make More When They Trade More?
Do Funds Make More When They Trade More?
Date Written: November 2014
Abstract
We find that active mutual funds perform better after trading more. This time-series relation between a fund's turnover and its subsequent benchmark adjusted return is especially strong for small, high-fee funds. These results are consistent with high-fee funds having greater skill to identify time-varying profit opportunities and with small funds being more able to exploit those opportunities. In addition to this novel evidence of managerial skill and fund-level decreasing returns to scale, we find evidence of industry-level decreasing returns: The positive turnover-performance relation weakens when funds act more in concert. We also identify a common component of fund trading that is correlated with mispricing proxies and helps predict fund returns.
Keywords: active management, mutual funds, performance, skill, turnover
JEL Classification: G10, G20
Suggested Citation: Suggested Citation
Lubos Pastor (Contact Author)
University of Chicago - Booth School of Business ( email )
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HOME PAGE: http://www.ChicagoGSB.edu/fac/lubos.pastor/
Robert F. Stambaugh
University of Pennsylvania - The Wharton School ( email )
The Wharton School, Finance Department
University of Pennsylvania
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United States
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215-898-6200 (Fax)
Lucian Taylor
University of Pennsylvania - The Wharton School ( email )
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Philadelphia, PA 19104-6365
United States