The price of skill: Performance evaluation by households

Alexi Savov

Journal of Financial Economics, 2014, vol. 112, issue 2, 213-231

Abstract: Skilled investors make money off uninformed investors. By acting as intermediaries, they provide a hedge to the uninformed investors themselves. I present a model in which households have imperfect information about expected returns. Non-traded income shocks lead them to rebalance, sometimes at the wrong time. Active funds hedge this risk by trading on superior information. In equilibrium, they pay off when non-traded income disappoints, earning a premium that makes them appear to underperform index funds after fees. Empirical results using aggregate fund flows support the model. A corresponding asset pricing test can account for the apparent underperformance of active funds.

Keywords: Mutual fund performance; Active funds; Index funds; Fund flows (search for similar items in EconPapers)
JEL-codes: G11 G12 G23 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:112:y:2014:i:2:p:213-231

DOI: 10.1016/j.jfineco.2013.11.005

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