Investor traps: Funds launched during booms

Bu Xu, Quanyi Xu, Xinxin Liu and Qirui Qin

Finance Research Letters, 2024, vol. 61, issue C

Abstract: Mutual fund companies typically launch new funds during booms, but little is known about how this behavior relates to investor returns. Using a sample of Chinese open-end mutual funds from 2005 to 2022, we find that the hotter the markets at fund inception, the lower the future investor returns. Fund underperformance and inferior investor premiums explain the lower investor returns. Moreover, fund underperformance is largely due to inappropriate timing of risk exposures, while inferior investor premiums indicate investors' unsophisticated capital flow decisions. Our study suggests that new fund inceptions during booms help increase management fees at the expense of investors.

Keywords: Fund inception; Investor return; Fund market state; Investor premium; Return decomposition (search for similar items in EconPapers)
JEL-codes: G11 G12 G23 G40 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:61:y:2024:i:c:s1544612324000746

DOI: 10.1016/j.frl.2024.105044

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