A BEJEAP Topics article.

Abstract

This paper analyses the impact of the emergence of new funds on the portfolio decisions of mutual fund managers who are evaluated on the basis of relative performance within a dynamic model. Recent theoretical literature has pointed to the inefficiencies in portfolio selection caused by relative performance evaluation of fund managers. We find that the on-going 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 characterises the mutual fund industry could explain why relative performance evaluation is widely in use.

Submitted: November 28, 2005 · Accepted: August 17, 2006 · Published: September 12, 2006

Originally published in Topics in Economic Analysis & Policy.

Recommended Citation

Loranth, Gyongyi and Sciubba, Emanuela (2006) "Relative Performance, Risk and Entry in the Mutual Fund Industry," Topics in Economic Analysis & Policy: Vol. 6 : Iss. 1, Article 19.
Available at: http://www.bepress.com/bejeap/topics/vol6/iss1/art19