Why Do Funds Make More When They Trade More?

59 Pages Posted: 27 Oct 2018 Last revised: 7 Nov 2022

See all articles by Jaden Jonghyuk Kim

Jaden Jonghyuk Kim

International Monetary Fund (IMF)

Jung Hoon Lee

Vanderbilt University - Finance

Shyam Venkatesan

Ivey Business School, Western University

Date Written: November 1, 2022

Abstract

We introduce a conditional measure of skill, the correlation between a funds' residual trades, net of common trading motives, and future news about the stocks traded. Using this measure, we show that the average mutual fund manager in the cross-section has stock-picking skill. This result is robust to different benchmarks and is mainly driven by the manager's ability to predict a firm's cash-flow news. This skill has short-term persistence and is distinctly related to traditional measures of performance. Importantly, consistent with the Berk and Green (2004), fund flows are increasing with respect to managerial skill after controlling for fund performance.

Keywords: Mutual fund, performance, skill

JEL Classification: G11, G20, G23

Suggested Citation

Kim, Jaden Jonghyuk and Lee, Jung Hoon and Venkatesan, Shyam Sunder, Why Do Funds Make More When They Trade More? (November 1, 2022). Available at SSRN: https://ssrn.com/abstract=3255030 or http://dx.doi.org/10.2139/ssrn.3255030

Jaden Jonghyuk Kim

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Jung Hoon Lee (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States
8123603309 (Phone)

Shyam Sunder Venkatesan

Ivey Business School, Western University ( email )

1151 Richmond St
London, Ontario N6A 3K7
Canada

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