DP13111 Idea Sharing and the Performance of Mutual Funds

Author(s): Julien Cujean
Publication Date: August 2018
Keyword(s): Idea Sharing, Performance, Rational-Expectations Equilibrium
JEL(s): D82, D83, D85, G23
Programme Areas: Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=13111

I develop an equilibrium model to explain why few mutual fund managers consistently outperform, even though many have strong informational advantages. The key ingredient is that managers obtain investment ideas through idea sharing. Idea sharing improves statistical significance of alpha through increased price informativeness. But it also causes better informed managers to take larger positions, which makes their alpha noisier although a significant fraction of managers build strong informational advantages, statistical significance and persistence of alpha concentrate in underperforming funds. I argue that in-house development of ideas cannot explain these facts.