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How rational and competitive is the market for mutual funds?


Leippold, Markus; Rüegg, Roger (2020). How rational and competitive is the market for mutual funds? Review of Finance, 24(3):579-613.

Abstract

To explore the rationality and competitiveness of the mutual fund industry, we analyze the alpha of active and index mutual funds from a global sample of more than 60,000 equity and fixed income funds and test the null hypothesis that alphas to investors are zero. We distinguish between institutional and retail investors since there are significant differences in management fees, economies of scale, and information asymmetries between these two groups. Using a new robust statistical test, we cannot reject our null hypothesis for the vast majority of investment categories. We find that the average active fund has less exposure to traditional risk factors, but higher sensitivity to alternative risk premia. Fund persistence and the impact of size and fees add further support to our conclusion that the mutual fund industry is highly competitive, except for US domestic funds. This set of funds is excessively overfunded compared to other fund categories.

Abstract

To explore the rationality and competitiveness of the mutual fund industry, we analyze the alpha of active and index mutual funds from a global sample of more than 60,000 equity and fixed income funds and test the null hypothesis that alphas to investors are zero. We distinguish between institutional and retail investors since there are significant differences in management fees, economies of scale, and information asymmetries between these two groups. Using a new robust statistical test, we cannot reject our null hypothesis for the vast majority of investment categories. We find that the average active fund has less exposure to traditional risk factors, but higher sensitivity to alternative risk premia. Fund persistence and the impact of size and fees add further support to our conclusion that the mutual fund industry is highly competitive, except for US domestic funds. This set of funds is excessively overfunded compared to other fund categories.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:1 May 2020
Deposited On:05 Jun 2019 07:23
Last Modified:15 May 2020 01:01
Publisher:Oxford University Press
ISSN:1572-3097
OA Status:Closed
Publisher DOI:https://doi.org/10.1093/rof/rfz011
Other Identification Number:merlin-id:17826

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Embargo till: 2021-06-01