DP3504 Relative Performance, Risk and Entry in the Mutual Fund Industry

Author(s): Gyöngyi Lóránth, Emanuela Sciubba
Publication Date: August 2002
Keyword(s): family of funds, fund management industry, ranking objectives, relative performance evaluation
JEL(s): G11, G24, L10
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3504

This Paper constitutes a first attempt to analyse the impact of the emergence of new funds on portfolio decisions of mutual fund managers who are evaluated on the basis of relative performance. Recent theoretical literature has pointed to the inefficiencies in portfolio selection caused by relative performance evaluation of fund managers. We find that the ongoing process of creation of new funds, by posing an entry threat to the incumbent fund managers, greatly alleviates these inefficiencies. Hence the transitory market structure that characterizes the mutual fund industry could explain why relative performance evaluation is widely in use.