On management risk and price in the mutual fund industry: style and performance distribution analysis

Juan Carlos Matallín-Sáez (), Amparo Soler-Domínguez and Diego Víctor Mingo-López
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Juan Carlos Matallín-Sáez: Universitat Jaume I
Amparo Soler-Domínguez: Universitat Jaume I
Diego Víctor Mingo-López: Universitat Jaume I

Risk Management, 2021, vol. 23, issue 1, No 7, 150-171

Abstract: Abstract This study shows how investing in mutual funds involves an additional risk, which we call management risk as a consequence of the uncertainty in the results of active management. To address this issue, we analyze a sample of 2539 US equity mutual funds. For comparative purposes, we differentiate among index funds and actively managed mutual funds with different investment styles. We observe that performance distribution shows negative mean, negative skewness, and excess kurtosis. Results also show that management risk is not rewarded with higher abnormal performance. Moreover, higher active management prices are linked to funds with higher management risk and negative asymmetry. Therefore, investors seem to be risk-seeking since they are paying more to participate in high asymmetric bets. Finally, we attempt to solve this puzzle from the behavioral finance perspective.

Keywords: Mutual funds; Management risk; Performance; Fees; Behavioral finance (search for similar items in EconPapers)
JEL-codes: D81 G11 G23 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1057/s41283-021-00072-9

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