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Better than the original? The relative success of copycat funds

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  • Verbeek, Marno
  • Wang, Yu

Abstract

We construct hypothetical copycat funds to investigate the performance of free-riding strategies that duplicate the disclosed asset holdings of actively managed mutual funds. On average, copycat funds are able to generate performance that is comparable to their target mutual funds, taking into account transaction costs and expenses. However, their relative success increased significantly after 2004 when the SEC imposed quarterly disclosure regulations on all mutual funds. We also find substantial cross-sectional dispersion in the relative performance of copycat funds. Free-riding on the portfolios disclosed by past winning funds and funds that disclose representative holdings generates significantly better performance net of trading costs and expenses than the vast majority of mutual funds. The results indicate that free-riding on disclosed fund holdings is an attractive strategy and suggest that mutual funds can suffer from the information disclosure requirements.

Suggested Citation

  • Verbeek, Marno & Wang, Yu, 2013. "Better than the original? The relative success of copycat funds," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3454-3471.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:9:p:3454-3471
    DOI: 10.1016/j.jbankfin.2013.04.024
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    Cited by:

    1. Wang, Danxia, 2024. "Beyond active share: Boosting fund performance through common holdings with same-benchmark mutual funds," International Review of Financial Analysis, Elsevier, vol. 92(C).
    2. Jiang, Hao & Verardo, Michela, 2018. "Does herding behavior reveal skill? An analysis of mutual fund performance," LSE Research Online Documents on Economics 86372, London School of Economics and Political Science, LSE Library.
    3. Sani, Jalal & Shroff, Nemit & White, Hal, 2023. "Spillover effects of mandatory portfolio disclosures on corporate investment," Journal of Accounting and Economics, Elsevier, vol. 76(2).
    4. Stein, Roberto, 2023. "Are mutual fund managers good gamblers?," Journal of Financial Markets, Elsevier, vol. 64(C).
    5. Dyakov, Teodor & Verbeek, Marno, 2013. "Front-running of mutual fund fire-sales," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4931-4942.
    6. Shi, Zhen, 2017. "The impact of portfolio disclosure on hedge fund performance," Journal of Financial Economics, Elsevier, vol. 126(1), pages 36-53.
    7. Jank, Stephan & Roling, Christoph & Smajlbegovic, Esad, 2021. "Flying under the radar: The effects of short-sale disclosure rules on investor behavior and stock prices," Journal of Financial Economics, Elsevier, vol. 139(1), pages 209-233.
    8. Alda, Mercedes & Muñoz, Fernando & Vargas, María, 2022. "Product differentiation in the socially responsible mutual fund industry," Journal of Multinational Financial Management, Elsevier, vol. 64(C).
    9. Sean Shun Cao & Kai Du & Baozhong Yang & Alan L. Zhang, 2021. "Copycat Skills and Disclosure Costs: Evidence from Peer Companies’ Digital Footprints," Journal of Accounting Research, Wiley Blackwell, vol. 59(4), pages 1261-1302, September.
    10. Zhe Chen & David R. Gallagher & Adrian D. Lee, 2017. "Testing the effect of portfolio holdings disclosure in an environment absent of mandatory disclosure," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57, pages 101-116, April.
    11. Mingwen Yang & Zhiqiang (Eric) Zheng & Vijay Mookerjee, 2022. "How Much Is Financial Advice Worth? The Transparency-Revenue Tension in Social Trading," Management Science, INFORMS, vol. 68(7), pages 5252-5268, July.
    12. Parida, Sitikantha & Teo, Terence, 2018. "The impact of more frequent portfolio disclosure on mutual fund performance," Journal of Banking & Finance, Elsevier, vol. 87(C), pages 427-445.
    13. Roberto Stein, 2022. "‘Smart’ copycat mutual funds: on the performance of partial imitation strategies," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-31, December.
    14. Agarwal, Vikas & Gay, Gerald D. & Ling, Leng, 2014. "Window dressing in mutual funds," CFR Working Papers 11-07 [rev.3], University of Cologne, Centre for Financial Research (CFR).
    15. Timmermann, Allan & Schmidt, Lawrence & , & Wermers, Russ, 2017. "Transparency, Investor Information Acquisition, and Money Market Fund Risk Rebalancing during the 2011-12 Eurozone Crisis," CEPR Discussion Papers 11895, C.E.P.R. Discussion Papers.
    16. Andrew Koch, 2017. "Herd Behavior and Mutual Fund Performance," Management Science, INFORMS, vol. 63(11), pages 3849-3873, November.
    17. Wang, Yaping & Paek, Miyoun & Ko, Kwangsoo, 2016. "Incubation and copying equity funds in China," Emerging Markets Review, Elsevier, vol. 28(C), pages 28-43.
    18. Gregory-Allen, Russell & Balli, Hatice Ozer & Thompson, Kathleen, 2019. "The impact of portfolio holdings disclosure on fund returns," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).

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    More about this item

    Keywords

    Mutual funds; Portfolio disclosure; SEC regulation; Copycat funds; Relative performance;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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