Does Scale Impact Skill?

42 Pages Posted: 21 Nov 2016 Last revised: 21 Jun 2017

See all articles by Campbell R. Harvey

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Yan Liu

Purdue University

Date Written: November 28, 2016


Borrowing insights from the literature on cross-country economic growth, we study the impact of scale on fund performance within a new econometric framework that features fund fixed effects, fund-specific impact of scale, and a simultaneous estimation of the impact of scale and exposures to benchmark risk factors. Applying our method to mutual fund data, we find an economically and statistically significant impact of individual fund scale. For an average fund in the cross-section, we estimate a drop in alpha of 20 basis points if the fund doubles its size over one year. We also find a non-negligible impact of the size of the fund industry, although its magnitude is significantly smaller than the impact of individual fund scale. We reconcile our findings with existing empirical studies. Taken as a whole, our results lend considerable support to theoretical models that build on the premise of decreasing return to scale for active portfolio management.

Keywords: Performance evaluation, Mutual funds, Hedge funds, EM algorithm, Fixed effects, Random effects, Scale, AUM, Alpha

JEL Classification: G10, G11, G12, G14, G23, G24

Suggested Citation

Harvey, Campbell R. and Liu, Yan, Does Scale Impact Skill? (November 28, 2016). Duke I&E Research Paper No. 2016-46, Available at SSRN: or

Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)


National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yan Liu

Purdue University ( email )

West Lafayette, IN 47907-1310
United States


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