Why do Funds Make More When They Trade More?

Jaden Jonghyuk Kim (), Jung Hoon Lee and Shyam Venkatesan
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Jaden Jonghyuk Kim: International Monetary Fund, 700 19th Street NW, Washington, DC 20431, USA
Shyam Venkatesan: Ivey Business School, University of Western Ontario, 1255 Western Rd, London, ON N6G 0N1, Canada

Quarterly Journal of Finance (QJF), 2022, vol. 12, issue 04, 1-52

Abstract: In this paper, we introduce a conditional measure of skill, the correlation between funds’ residual trades, net of common trading motives, and future news about the stocks traded. Using this measure, we show that the average mutual fund manager in the cross-section has stock-picking skill. This result is robust to different benchmarks and is mainly driven by the manager’s ability to predict a firm’s cash-flow news. This skill has short-term persistence and is distinctly related to traditional measures of performance. Importantly, consistent with Berk and Green [2004, Mutual Fund Flows and Performance in Rational Markets, Journal of Political Economy 112(6), 1269–1295] fund flows are increasing with respect to managerial skill after controlling for fund performance.

Keywords: Mutual fund; performance; skill (search for similar items in EconPapers)
JEL-codes: G11 G20 G23 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1142/S2010139222500148

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