Fund Managers Who Take Big Bets: Skilled or Overconfident

31 Pages Posted: 21 Mar 2006

See all articles by Jeffrey A. Busse

Jeffrey A. Busse

Emory University - Department of Finance

T. Clifton Green

Emory University - Department of Finance

Klaas Baks

Emory University - Department of Finance

Abstract

We document a positive relation between mutual fund performance and managers' willingness to take big bets in a relatively small number of stocks. Focused managers outperform their more broadly diversified counterparts by approximately 30 basis points per month, or roughly 4% annualized. The results hold for mimicking portfolios based on fund holdings as well as when returns are measured net of expenses. Concentrated managers outperform precisely because their big bets outperform the top holdings of more diversified funds. The evidence suggests that investors may enhance performance by diversifying across focused managers rather than by investing in highly diversified funds.

Suggested Citation

Busse, Jeffrey A. and Green, T. Clifton and Baks, Klaas, Fund Managers Who Take Big Bets: Skilled or Overconfident. AFA 2007 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=891727 or http://dx.doi.org/10.2139/ssrn.891727

Jeffrey A. Busse

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-0160 (Phone)
404-727-5238 (Fax)

T. Clifton Green (Contact Author)

Emory University - Department of Finance ( email )

1300 Clifton Rd.
Atlanta, GA 30322-2710
United States
404-727-5167 (Phone)
404-727-5238 (Fax)

Klaas Baks

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States

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