Is the Active Fund Management Industry Concentrated Enough?

47 Pages Posted: 26 Feb 2016 Last revised: 15 Aug 2019

See all articles by David Feldman

David Feldman

Banking and Finance, UNSW Business School, UNSW Sydney; Financial Research Network (FIRN)

Konark Saxena

University of New South Wales

Jingrui Xu

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

Date Written: October 25, 2018

Abstract

We introduce a theoretical model of the active fund management industry (AFMI) in which performance and size depend on the AFMI’s competitiveness (concentration). Under plausible assumptions, as AFMI’s concentration decreases, so do fund managers’ incentives for exerting effort in search of alpha. Consequently, managers produce lower gross alpha, and rational investors, inferring lower expected AFMI performance, allocate a smaller portion of their wealth to active funds. Empirically, we find that a decrease in the US mutual fund industry concentration over our sample period is associated with a decrease in its net alpha and size (relative to stock market capitalization).

Keywords: Active fund management, Market concentration, Effort, Industry size, Alpha

JEL Classification: G11, G23, J24, L11

Suggested Citation

Feldman, David and Saxena, Konark and Xu, Jingrui, Is the Active Fund Management Industry Concentrated Enough? (October 25, 2018). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2737875 or http://dx.doi.org/10.2139/ssrn.2737875

David Feldman (Contact Author)

Banking and Finance, UNSW Business School, UNSW Sydney ( email )

UNSW Sydney, NSW 2052
Australia
+61 2 9385 5748 (Phone)
+61 2 9385 6347 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Konark Saxena

University of New South Wales ( email )

School of Banking and Finance
Australian School of Business
Sydney, NSW 2052
Australia

Jingrui Xu

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

China

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