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Investor traps: Funds launched during booms

Author

Listed:
  • Xu, Bu
  • Xu, Quanyi
  • Liu, Xinxin
  • Qin, Qirui

Abstract

Mutual fund companies typically launch new funds during booms, but little is known about how this behavior relates to investor returns. Using a sample of Chinese open-end mutual funds from 2005 to 2022, we find that the hotter the markets at fund inception, the lower the future investor returns. Fund underperformance and inferior investor premiums explain the lower investor returns. Moreover, fund underperformance is largely due to inappropriate timing of risk exposures, while inferior investor premiums indicate investors' unsophisticated capital flow decisions. Our study suggests that new fund inceptions during booms help increase management fees at the expense of investors.

Suggested Citation

  • Xu, Bu & Xu, Quanyi & Liu, Xinxin & Qin, Qirui, 2024. "Investor traps: Funds launched during booms," Finance Research Letters, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:finlet:v:61:y:2024:i:c:s1544612324000746
    DOI: 10.1016/j.frl.2024.105044
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    More about this item

    Keywords

    Fund inception; Investor return; Fund market state; Investor premium; Return decomposition;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G40 - Financial Economics - - Behavioral Finance - - - General

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