Do Funds Make More When They Trade More?
46 Pages Posted: 19 Nov 2014
There are 4 versions of this paper
Do Funds Make More When They Trade More?
Do Funds Make More When They Trade More?
Do Funds Make More When They Trade More?
Do Funds Make More When They Trade More?
Date Written: November 4, 2014
Abstract
We find that active mutual funds perform better after trading more. This time-series relation between a fund’s turnover and its subsequent benchmark-adjusted return is especially strong for small, high-fee funds. These results are consistent with high-fee funds having greater skill to identify time-varying profit opportunities and with small funds being more able to exploit those opportunities. In addition to this novel evidence of managerial skill and fund-level decreasing returns to scale, we find evidence of industry-level decreasing returns: The positive turnover-performance relation weakens when funds act more in concert. We also identify a common component of fund trading that is correlated with mispricing proxies and helps predict fund returns.
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