What's Trending? The Performance and Motivations for Mutual Fund Startups

Abstract

We examine how the motivation behind the launch of a mutual fund is associated with the fund's subsequent performance. We find that mutual funds have incentives to cater to investor sentiment to attract assets under management by launching trendy mutual funds. The incentives to launch trendy funds exist regardless of whether the fund sponsor is skilled or expects future outperformance. Newly launched trendy funds generate significant additional inflows in their first twelve months, yet underperform over their first five years compared to non-trendy funds. Our results suggest that mutual fund launches appear to be motivated by considerations other than skill.

Keywords: Mutual Funds, Startup Mutual Funds, Mutual Fund Flows, Performance

JEL Classification: G11, G12, G20, G23