Industry-Level Returns to Scale and Investor Flows in Asset Management

Abstract

This paper provides new evidence about returns to scale in asset management, and their connection with capital flows to funds by investors. Equity mutual funds have diminishing returns to scale at the industry level, while hedge and fixed income funds have increasing returns to scale. The flow-performance relation is convex (concave) when the funds operate under decreasing (increasing) returns to scale. Passive funds are unaffected by scale effects. These results are consistent with the predictions of Magkotsios (2018).

Keywords: Investment Management, Alpha, Returns to Scale, Mutual Funds, Bond Funds, Money Market Funds, Hedge Funds, Index Funds, ETF

JEL Classification: G11, G12, G23