The Allocation of Talent Across Mutual Fund Strategies

46 Pages Posted: 14 Feb 2019 Last revised: 11 May 2020

See all articles by Andrea M Buffa

Andrea M Buffa

University of Colorado at Boulder - Leeds School of Business

Apoorva Javadekar

Indian School of Business

Date Written: May 2020

Abstract

We propose a theory of self-selection by mutual fund managers into picking and timing strategies. With adverse selection, investors learn more easily about the skill of picking funds than of timing funds, since picking investments are less correlated than timing investments. The equilibrium allocation of talent across strategies is such that high-skill managers always pick, while low-skill managers time with positive probability. Although picking strategies do not outperform timing strategies, our model generates the empirically documented outperformance of pickers over timers. Consistent with an investor-learning channel, we show in the model and validate in the data that picking funds exhibit higher flow-performance sensitivity than timing funds, and low-skill managers have the incentive to rely more on timing strategies when their reputation, or aggregate volatility, increase.

Keywords: mutual funds, self-selection, stock picking, market timing, investors' learning, fund flows, fund performance, market volatility

JEL Classification: G23, D82

Suggested Citation

Buffa, Andrea M and Javadekar, Apoorva, The Allocation of Talent Across Mutual Fund Strategies (May 2020). Indian School of Business, Available at SSRN: https://ssrn.com/abstract=3327638 or http://dx.doi.org/10.2139/ssrn.3327638

Andrea M Buffa (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

Apoorva Javadekar

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

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