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Is the active fund management industry concentrated enough?

David Feldman, Konark Saxena and Jingrui Xu

Journal of Financial Economics, 2020, vol. 136, issue 1, 23-43

Abstract: We introduce a theoretical model of the active fund management industry (AFMI) in which performance and size depend on the AFMI's competitiveness (concentration). Under plausible assumptions, as AFMI's concentration decreases, so do fund managers’ incentives for exerting effort in search of alpha. Consequently, managers produce lower gross alpha, and rational investors, inferring lower expected AFMI performance, allocate a smaller portion of their wealth to active funds. Empirically, we find that a decrease in the US mutual fund industry concentration over our sample period is associated with a decrease in its net alpha and size (relative to stock market capitalization).

Keywords: Active fund management; Market concentration; Effort; Industry size; Alpha (search for similar items in EconPapers)
JEL-codes: G11 G23 J24 L11 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:136:y:2020:i:1:p:23-43

DOI: 10.1016/j.jfineco.2019.08.009

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