55 Pages Posted: 2 Aug 2017 Last revised: 12 Aug 2020
Date Written: January 9, 2020
We study tradeoffs among active mutual funds' characteristics. In both our equilibrium model and the data, funds with larger size, lower expense ratio, and higher turnover hold more-liquid portfolios. Portfolio liquidity, a concept introduced here, depends not only on the liquidity of the portfolio's holdings but also on the portfolio's diversification. We also confirm other model-predicted tradeoffs: Larger funds are cheaper. Larger and cheaper funds are less active, based on our new measure of activeness. Better-diversified funds hold less-liquid stocks; they are also larger, cheaper, and trade more. These tradeoffs provide novel evidence of diseconomies of scale in active management.
Keywords: fund tradeoffs, fund characteristics, portfolio liquidity, diversification
JEL Classification: G11, G23
Suggested Citation: Suggested Citation