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A Tournament Model of Fund Management

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  • Daniella Acker
  • Nigel W. Duck

Abstract

We develop a tournament model of portfolio management and test it on UK investment trusts. Our model extends the literature by analysing middle‐ranking funds who aim to beat a benchmark; spanning two periods; focusing on ‘extreme’ portfolios; and using a signal‐extraction framework. We predict that ‘losing’ managers will adopt extreme portfolios, and increasingly so, the further behind the fund is and the nearer the ranking date. Losing managers will choose high/low market exposure depending both on anticipated market movements and on whether they have sufficient assets to take advantage of a rising market. Our empirical tests support these predictions.

Suggested Citation

  • Daniella Acker & Nigel W. Duck, 2006. "A Tournament Model of Fund Management," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(9‐10), pages 1460-1483, November.
    • Handle: RePEc:bla:jbfnac:v:33:y:2006:i:9-10:p:1460-1483
    DOI: 10.1111/j.1468-5957.2006.00648.x
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    References listed on IDEAS

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    Cited by:

    1. Debapriya Jojo Paul & Julia Henker & Sian Owen, 2019. "The aggregate impacts of tournament incentives in experimental asset markets," Experimental Economics, Springer;Economic Science Association, vol. 22(2), pages 441-476, June.
    2. Chang, Xiaochen & Guo, Songlin & Huang, Junkai, 2022. "Kidnapped mutual funds: Irrational preference of naive investors and fund incentive distortion," International Review of Financial Analysis, Elsevier, vol. 83(C).
    3. Paul Cox & Stephen Brammer & Andrew Millington, 2007. "Pension Fund Manager Tournaments and Attitudes Towards Corporate Characteristics," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(7‐8), pages 1307-1326, September.
    4. David G. Shrider, 2009. "Running From a Bear: How Poor Stock Market Performance Affects the Determinants of Mutual Fund Flows," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(7‐8), pages 987-1006, September.
    5. David G. Shrider, 2009. "Running From a Bear: How Poor Stock Market Performance Affects the Determinants of Mutual Fund Flows," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(7-8), pages 987-1006.
    6. Edward Anderson, 2012. "Ranking Games and Gambling: When to Quit When You're Ahead," Operations Research, INFORMS, vol. 60(5), pages 1229-1244, October.
    7. Alexander Kempf & Stefan Ruenzi, 2008. "Family Matters: Rankings Within Fund Families and Fund Inflows," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(1‐2), pages 177-199, January.
    8. Hallahan, Terrence & Faff, Robert, 2009. "Tournament behavior in Australian superannuation funds: A non-parametric analysis," Global Finance Journal, Elsevier, vol. 19(3), pages 307-322.
    9. Aymen Karoui & Iwan Meier, 2015. "Fund performance and subsequent risk: a study of mutual fund tournaments using holdings-based measures," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 29(1), pages 1-20, February.
    10. Philipp Hornung & Ulrike Leopold-Wildburger & Roland Mestel & Stefan Palan, 2015. "Insider behavior under different market structures: experimental evidence on trading patterns, manipulation, and profitability," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 23(2), pages 357-373, June.

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