Decomposing Fund Activeness

55 Pages Posted: 12 May 2020 Last revised: 29 Jul 2021

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: July 2021

Abstract

We decompose the variance of mutual funds’ active returns into its idiosyncratic and systematic components, and introduce idiosyncratic activeness (IDA) as a novel measure of the source of fund activeness. We uncover that the positive association between level of activeness and fund performance is entirely driven by high-IDA funds. We find that these funds outperform despite high-IDA strategies having more severe decreasing returns to scale, and not being inherently more profitable, suggesting that high-IDA funds are more skilled. Our decomposition also provides new insights in the evolution of smart-beta strategies in the mutual fund industry.

Keywords: mutual funds, fund activeness, idiosyncratic activeness, fund performance, managerial skill, decreasing returns to scale, smart-beta

JEL Classification: G23, G11

Suggested Citation

Buffa, Andrea M and Javadekar, Apoorva, Decomposing Fund Activeness (July 2021). Available at SSRN: https://ssrn.com/abstract=3597969 or http://dx.doi.org/10.2139/ssrn.3597969

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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