Journal of Financial Economics Vol. 138 No. 3 2020
Fund tradeoffs
Abstract
We study tradeoffs among active mutual funds’ characteristics. In both our equilibrium model and the data, funds with larger size, lower expense ratio, and higher turnover hold more-liquid portfolios. Portfolio liquidity, a concept introduced here, depends not only on the liquidity of the portfolio’s holdings but also on the portfolio’s diversification. We also confirm other model-predicted tradeoffs. Larger funds are cheaper. Larger and cheaper funds are less active, based on our new measure of activeness. Better-diversified funds hold less-liquid stocks; they are also larger and cheaper, and they trade more. These tradeoffs provide novel evidence of diseconomies of scale in active management.
- DOI
- 10.1016/j.jfineco.2020.06.005
- Volume
- 138
- Issue
- 3
- Pages
- 614-634
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref