Does Fund Size Erode Performance? Liquidity, Organizational Diseconomies and Active Money Management

44 Pages Posted: 20 Jun 2003  

Joseph Chen

University of California, Davis - Graduate School of Management

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Ming Huang

Cornell University - Samuel Curtis Johnson Graduate School of Management

Jeffrey D. Kubik

Syracuse University - Department of Economics

Date Written: September 2002

Abstract

We investigate the effect of fund size on performance among active mutual funds. We first document that fund returns, both before and after management fees, decline with fund size, even after adjusting performance by various benchmarks and controlling for other fund characteristics such as turnover and age. We then explore a number of potential explanations for this relationship. We find that the effect of fund size on fund returns is most pronounced among funds that play small cap stocks. Interestingly, performance only depends on fund size and does not decline with family size. Finally, small funds are better than large ones at investing in local companies. We argue that these findings are consistent with both liquidity and organizational diseconomies being important factors behind the documented diseconomies of scale in money management.

Suggested Citation

Chen, Joseph and Hong, Harrison G. and Huang, Ming and Kubik, Jeffrey D., Does Fund Size Erode Performance? Liquidity, Organizational Diseconomies and Active Money Management (September 2002). Available at SSRN: https://ssrn.com/abstract=327960 or http://dx.doi.org/10.2139/ssrn.327960

Joseph S. Chen (Contact Author)

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
(530) 752-7155 (Phone)
(530) 752-2924 (Fax)

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ming Huang

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-225-9594 (Phone)

Jeffrey D. Kubik

Syracuse University - Department of Economics ( email )

426 Eggers Hall
Syracuse, NY 13244-1020
United States
315-443-9063 (Phone)
315-443-1081 (Fax)

Paper statistics

Downloads
814
Rank
22,812
Abstract Views
3,533