Abstract We examine the informativeness of fund risk disclosure by combining fund returns and textual data. We develop a novel measure, INF, to capture the explanatory power of disclosed risks for fund returns. Average INF is 55% after controlling for market risk and remains 26–29% after excluding risks related to fund name or strategy. We explain variations in INF through disclosure costs and benefits: (1) Funds with less informative disclosures face SEC comment letters and reduced flow, (2) informative disclosures attract institutional flows, and (3) performance concerns may disincentivize disclosure. Overall, funds face trade-offs between transparency and maintaining their competitive advantage.

Abstract We show that scale in active equity portfolios is understated by at least 65% because the majority of mutual funds have “twin” institutional vehicles (IVs) managed under the same strategies. Omitting these IVs can severely skew crucial estimates in asset management research: by including IV assets, diminishing returns to scale of active investments is significantly reduced, and dollar value added of active strategies is more substantial and persistent than previously suggested. We further show that IV assets meaningfully influence managers’ portfolio decisions. In addition, these measurement issues apply to common flow measures and extend to passive funds and bond funds.