Rent Seeking and Mutual Fund Inceptions

40 Pages Posted: 4 Jun 2018

See all articles by Oleg Chuprinin

Oleg Chuprinin

UNSW; Financial Research Network (FIRN)

Thomas Ruf

University of New South Wales (UNSW)

Date Written: June 4, 2018

Abstract

We show that some mutual funds are created to exploit investor irrationality and prioritize raising short-term capital over value creation. We find that capital flows into new funds, which lack performance histories, are especially sensitive to portfolio compositions. Funds loading heavily on past winner stocks at inception attract abnormally high flows, but only until they accumulate a performance record of sufficient length. This short-term flow-boosting strategy is associated with a long-term (up to eight years) fund underperformance, suggesting that availability of managerial talent or investment opportunities were not the main motives for the fund initiation. Overall, we establish that poor mutual fund performance, a pervasive phenomenon, can result from rent seeking incentives which drive fund inceptions. This mechanism also explains proliferation of inferior funds in the cross-section.

Keywords: mutual funds, rent seeking, performance predictability

JEL Classification: G11, G23

Suggested Citation

Chuprinin, Oleg and Ruf, Thomas, Rent Seeking and Mutual Fund Inceptions (June 4, 2018). Available at SSRN: https://ssrn.com/abstract=3189986 or http://dx.doi.org/10.2139/ssrn.3189986

Oleg Chuprinin (Contact Author)

UNSW ( email )

Room 349, UNSW Business School
High St
UNSW Sydney, NSW 2052
Australia
406674419 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Thomas Ruf

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

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