Why Do Funds Make More When They Trade More?
59 Pages Posted: 27 Oct 2018 Last revised: 7 Nov 2022
Date Written: November 1, 2022
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: Suggested Citation