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A Horizon‐Based Decomposition of Mutual Fund Value Added Using Transactions

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  • JULES VAN BINSBERGEN
  • JUNGSUK HAN
  • HONGXUN RUAN
  • RAN XING

Abstract

We decompose mutual fund value added by the length of funds' holdings using transaction‐level data. We motivate our decomposition with a model featuring horizon‐specific investment ideas, where short‐term ideas are less scalable because the associated trades cannot be spread over time. Fund turnover correlates negatively with the horizon over which value is added and positively with price impact costs. As predicted, holdings of high‐turnover funds add a substantial amount of value in the first two weeks, of which more than 80% is earned on Federal Open Market Committee (FOMC) and earnings announcement days. Holdings of low‐turnover funds add value only over longer horizons.

Suggested Citation

  • Jules Van Binsbergen & Jungsuk Han & Hongxun Ruan & Ran Xing, 2024. "A Horizon‐Based Decomposition of Mutual Fund Value Added Using Transactions," Journal of Finance, American Finance Association, vol. 79(3), pages 1831-1882, June.
    • Handle: RePEc:bla:jfinan:v:79:y:2024:i:3:p:1831-1882
    DOI: 10.1111/jofi.13331
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