Crowding: Evidence from Fund Managerial Structure
60 Pages Posted: 9 Apr 2020 Last revised: 10 Apr 2021
Date Written: April 9, 2021
Over the past 30 years, a striking evolution in fund management structure has taken place, with the proportion of team-managed funds growing from 33% to over 70%. While many focus on the potential link to declining fund performance, our paper presents evidence that the shift to team management is likely a response to crowding: adding new managers brings fresh investment ideas which implies that any individual idea is less crowded. Our results show that funds that transition to team management have less concentrated portfolios and lower decreasing returns to scale. Consistent with the crowding of ideas, we show that diversification of team skills is important for reducing the impact of fund size on performance. We also find the performance of managers who employ systematic investment processes is not as sensitive to inflows, suggesting discretionary managers with a limited number of ideas are more likely to run into capacity constraints.
Keywords: Mutual funds, managerial structure, diseconomies of scale, crowding, performance evaluation, decreasing returns to scale, alpha, capacity constraints, discretionary management, systematic management.
JEL Classification: G11, G12, G14, G23, L22, L2
Suggested Citation: Suggested Citation