Strategic Mutual Fund Tournaments
61 Pages Posted: 17 Mar 2012 Last revised: 13 May 2018
Date Written: May 9, 2018
Abstract
This paper characterizes the optimal risk-taking strategies of mutual fund managers competing in multi-period winner-take-all tournaments. With competition among mutual funds, every fund begins by taking maximum risk. In the final period, all funds continue to take maximum risk except possibly the leading fund, which plays a “lock-in” strategy but only when the magnitude of the lead is great enough. Contrary to the standard result, our prediction implies that we should observe a reduction in risk-taking by the leader to strategically lock in the advantage, rather than an increase in risk-taking by the trailers to try to catch up. We provide supportive empirical evidence, which is robust to alternate specifications.
Keywords: tournaments, mutual funds, risk
JEL Classification: G23, G11
Suggested Citation: Suggested Citation