Is the Active Fund Management Industry Concentrated Enough?
47 Pages Posted: 26 Feb 2016 Last revised: 15 Aug 2019
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: Suggested Citation