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Why mutual funds underperform
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DOI：10.1016/j.jfineco.2010.10.008.png)
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Abstract
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I propose a parsimonious model that reproduces the negative risk-adjusted performance of actively managed equity mutual funds. In the model, a fund manager can generate state-dependent active returns at a disutility. Negative expected performance and mutual fund investing simultaneously arise in equilibrium because the active return the fund manager generates covaries positively with a component of the pricing kernel that the performance measure omits, consistent with recent empirical evidence. Using data on U.S. funds, I also document new empirical evidence consistent with the model's cross-sectional implications. (C) 2010 Elsevier B.V. All rights reserved.
Keywords:
Mutual fund
Performance
Business cycle
Investment
Pricing kernel
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