Relative Performance, Risk and Entry in the Mutual Fund Industry
34 Pages Posted: 10 Jul 2002
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
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