Remeasuring Scale in Active Management

59 Pages Posted: 8 Nov 2023 Last revised: 31 Aug 2024

See all articles by Shiyang Huang

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics

Xu Lu

University of Washington - Michael G. Foster School of Business

Yang Song

University of Washington - Michael G. Foster School of Business

Hong Xiang

The Hong Kong Polytechnic University

Date Written: October 11, 2023

Abstract

We argue that 65% more total assets should be included in the scale measure of actively managed portfolios. By leveraging two major datasets of institutional products, we identify trillions of institutional assets that are co-managed with their "twin" mutual funds with average return correlations of 99.9%. By including these institutional assets, fund-level (industry-level) diminishing returns to scale of active investments is reduced by up to 90% (70%), and the dollar value added of active strategies is more substantial and persistent than previously suggested. Besides skewing crucial estimates in active asset management, the measurement issues extend to flow metrics and passive investments.

Suggested Citation

Huang, Shiyang and Lu, Xu and Song, Yang and Xiang, Hong, Remeasuring Scale in Active Management (October 11, 2023). Available at SSRN: https://ssrn.com/abstract=4599484 or http://dx.doi.org/10.2139/ssrn.4599484

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Xu Lu

University of Washington - Michael G. Foster School of Business ( email )

Seattle, WA 98195
United States

Yang Song (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Hong Xiang

The Hong Kong Polytechnic University ( email )

Hong Kong
Hong Kong

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