Relative Performance, Risk and Entry in the Mutual Fund Industry

50 Pages Posted: 1 Oct 2002

See all articles by Gyongyi Loranth

Gyongyi Loranth

Centre for Economic Policy Research (CEPR)

Emanuela Sciubba

University of London - Birkbeck College

Multiple version iconThere are 2 versions of this paper

Date Written: August 2002

Abstract

This Paper constitutes a first attempt to analyse the impact of the emergence of new funds on portfolio decisions of mutual fund managers who are evaluated on the basis of relative performance. Recent theoretical literature has pointed to the inefficiencies in portfolio selection caused by relative performance evaluation of fund managers. We find that the ongoing process of creation of new funds, by posing an entry threat to the incumbent fund managers, greatly alleviates these inefficiencies. Hence the transitory market structure that characterizes the mutual fund industry could explain why relative performance evaluation is widely in use.

Keywords: Relative performance evaluation, fund management industry, ranking objectives, family of funds

JEL Classification: G11, G24, L10

Suggested Citation

Loranth, Gyongyi and Sciubba, Emanuela, Relative Performance, Risk and Entry in the Mutual Fund Industry (August 2002). CEPR Discussion Paper No. 3504. Available at SSRN: https://ssrn.com/abstract=333721

Gyongyi Loranth (Contact Author)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Emanuela Sciubba

University of London - Birkbeck College ( email )

Malet Street
London, WC1E 7HX
United Kingdom

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