Fund Managers’ Competition for Investment Flows Based on Relative Performance

Gu Wang () and Jiaxuan Ye ()
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Gu Wang: Worcester Polytechnic Institute
Jiaxuan Ye: Illinois Institute of Technology

Journal of Optimization Theory and Applications, 2023, vol. 198, issue 2, No 7, 605-643

Abstract: Abstract N mutual funds compete for fund flows based on relative performance over their average returns, by choosing between an idiosyncratic and a common risky investment opportunities. The unique constant equilibrium is derived in closed form, which implies that funds generally decrease the investments in their idiosyncratic risky assets under competition, in order to lower the risk of the relative performance. It pushes all funds to herd and hurts their after-fee performance. However, the sufficiently disadvantaged funds with poor idiosyncratic investment opportunities or highly risk averse managers may take excessive risk for a better chance of attracting new investments, and their performance may improve comparing to the case without competition and benefit the investors.

Keywords: Portfolio choice; Mutual funds; Fund flows; Relative performance; Equilibrium; 91G10; 91G80 (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s10957-023-02221-4

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