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Strategic Choice of Risk: Evidence from Mutual Fund Families

Author

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  • Chia-Ying Chan

    (Yuan Ze University)

  • Christine W. Lai

    (National Taiwan Normal University)

  • Liang-Chung Lee

    (Yuan Ze University)

Abstract

This study examines family-level risk taking behavior from the perspective of the strategic choice of risk. We examine whether family-level risk taking tendency is affected by a fund family’s flow tournament position in the mutual fund industry. We use family-level excess fund flow, which is defined by the gap between the actual net flows and expected net flows of a fund family, to proxy for its interim fund-flow tournament position. A fund family is an interim winner (loser) if it experiences better (worse) than expected net flows. Two measures are used to proxy for risk taking strategy: (1) Active Share; and (2) the Standard Deviation of Fund Holdings at Family Level. Overall, we conclude that fund families classified as interim losers and top interim winners in a net flow tournament position exhibit risk taking propensities. Bottom dwellers increase risk for survival, whereas leaders increase risk to retain their leadership.

Suggested Citation

  • Chia-Ying Chan & Christine W. Lai & Liang-Chung Lee, 2017. "Strategic Choice of Risk: Evidence from Mutual Fund Families," Journal of Financial Services Research, Springer;Western Finance Association, vol. 51(1), pages 125-163, February.
    • Handle: RePEc:kap:jfsres:v:51:y:2017:i:1:d:10.1007_s10693-016-0242-5
    DOI: 10.1007/s10693-016-0242-5
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    Cited by:

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    2. Mercedes Alda, 2021. "The dilemma between fund‐style consistency and active management over the economic cycle. Evidence from pension funds," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 2219-2240, April.
    3. Zhao, Lu & Wang, Liang & Luo, Ronghua, 2024. "Mutual fund tournaments: State-dependent risk taking with transaction costs," Emerging Markets Review, Elsevier, vol. 59(C).
    4. Gajewski, Jean-François & Tran Dieu, Linh, 2021. "Determinants and performance of outsourcing in the european mutual fund market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 73(C).
    5. Alda, Mercedes, 2018. "A strategic fund family business decision: The pension fund liquidation," Journal of Business Research, Elsevier, vol. 91(C), pages 248-265.
    6. Jean-François Gajewski & Linh Tran Dieu, 2021. "Determinants And Performance Of Outsourcing In The European Mutual Fund Market," Post-Print hal-03221014, HAL.
    7. Chua, Angeline Kim Pei & Tam, On Kit, 2020. "The shrouded business of style drift in active mutual funds," Journal of Corporate Finance, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    Risk taking; Strategic choice of risk; Fund-flow tournament; Mutual fund family;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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