Relative Performance, Risk and Entry in the Mutual Fund Industry

34 Pages Posted: 10 Jul 2002

See all articles by Gyongyi Loranth

Gyongyi Loranth

Centre for Economic Policy Research (CEPR)

Emanuela Sciubba

University of London - Birkbeck College

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Abstract

This paper constitutes a first attempt to analyse the impact of the emergence of new funds on portfolio decisions of mutual fund managers who are evaluated on the basis of relative performance. Recent theoretical literature has pointed at the inefficiencies in portfolio selection caused by relative performance evaluation of fund managers. We find that the on-going process of creation of new funds, by posing an entry threat to the incumbent fund managers, greatly alleviates these inefficiencies. Hence the transitory market structure that characterises the mutual fund industry could explain why relative performance evaluation is widely in use.

Keywords: Fund management industry, ranking objectives, family of funds

JEL Classification: G11, G24, L20

Suggested Citation

Loranth, Gyongyi and Sciubba, Emanuela, Relative Performance, Risk and Entry in the Mutual Fund Industry. Available at SSRN: https://ssrn.com/abstract=302467 or http://dx.doi.org/10.2139/ssrn.302467

Gyongyi Loranth (Contact Author)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Emanuela Sciubba

University of London - Birkbeck College ( email )

Malet Street
London, WC1E 7HX
United Kingdom

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