Foreignness and the Incentive to Generate Alpha: Evidence from Offshore Cross-Border Mutual Funds

Abstract

We analyze Europe equity funds domiciled offshore in Luxembourg/Ireland (top 2/3 domiciles in the world by total assets) and sold across the world, relative to their onshore counterparts. These offshore cross-border funds are more actively managed and have a markedly stronger flow-performance sensitivity. This suggests a more sophisticated and performance-sensitive clientele less concerned with brand foreignness. Consistent with a greater incentive to generate alpha, such funds not only outperform, but the returns to active portfolio management are also more than twice as high. Finally, we rule out an alternative explanation based on a more diversified shareholder base.

Keywords: Mutual Funds, Offshore, Familiarity, Performance, Active Fund Management, Flow-Performance Sensitivity, Competition

JEL Classification: G11, G12, G14, G15, G23