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Crowding of International Mutual Funds

Tanja Artiga Gonzalez, Teodor Dyakov, Justus Inhoffen and Evert Wipplinger

No 1937, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: We construct a fund-specific measure of crowding using the equity holdings overlap of 17,364 global funds which are actively managed. Funds in the top decile of crowding underperform the passive benchmark by 1.4% per year. The poor performance cannot be attributed to fees and transaction costs alone. When we explore the economics behind crowding, we establish that the diseconomies of crowding are distinct from the ones associated with size. Among several possible mechanisms, we find support for a) a preference for liquid stocks among crowded funds and b) differences in the propagation of price pressure from flows of connected funds. Our findings reveal that the tendency of managers to follow correlated strategies is a major source of diseconomies in the active fund industry.

Keywords: Mutual funds; crowding; diseconomies of scale (search for similar items in EconPapers)
JEL-codes: G15 G23 (search for similar items in EconPapers)
Pages: 59 p.
Date: 2021
New Economics Papers: this item is included in nep-cwa and nep-fmk
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Handle: RePEc:diw:diwwpp:dp1937