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Trade Less and Exit Overcrowded Markets: Lessons from International Mutual Funds

Author

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  • Teodor Dyakov
  • Hao Jiang
  • Marno Verbeek

Abstract

We study active investment skills in relation to returns to scale in the active mutual fund industry. Using a sample of 13,807 funds from sixteen domicile countries investing in forty-two equity markets from 2001 to 2014, we find that they achieve negative trading performance on average, driven mainly by particularly low returns to their trades in US equities. Exploring their investment environment, we find convincing evidence of decreasing returns to scale around the world, especially for the US market. Based on theory of optimal fund size, we estimate the optimal size of the active mutual fund industry. We find that the active mutual fund industry in USA has exceeded the optimal level, whereas in the international markets, there may still be room for further expansion. Consistent with this view, we find that mutual fund managers have been gradually reallocating their assets away from the USA and more into international equity markets.

Suggested Citation

  • Teodor Dyakov & Hao Jiang & Marno Verbeek, 2020. "Trade Less and Exit Overcrowded Markets: Lessons from International Mutual Funds," Review of Finance, European Finance Association, vol. 24(3), pages 677-731.
    • Handle: RePEc:oup:revfin:v:24:y:2020:i:3:p:677-731.
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    File URL: http://hdl.handle.net/10.1093/rof/rfz014
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    Citations

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    Cited by:

    1. Bianchi, Daniele & Babiak, Mykola, 2022. "On the performance of cryptocurrency funds," Journal of Banking & Finance, Elsevier, vol. 138(C).
    2. Artiga Gonzalez, Tanja & Dyakov, Teodor & Inhoffen, Justus & Wipplinger, Evert, 2024. "Crowding of international mutual funds," Journal of Banking & Finance, Elsevier, vol. 164(C).
    3. Chen Su, 2023. "The price impact of analyst revisions and the state of the economy: Evidence around the world," The Financial Review, Eastern Finance Association, vol. 58(4), pages 887-930, November.
    4. Dachen Sheng & Heather A. Montgomery, 2024. "Assessing Mutual Fund Performance in China: A Sector Weight-Based Approach," Mathematics, MDPI, vol. 12(16), pages 1-21, August.
    5. Fröberg, Emelie & Halling, Michael, 2024. "Do investors benefit from MiFID II unbundling?," Journal of Corporate Finance, Elsevier, vol. 87(C).

    More about this item

    Keywords

    International mutual funds; Trading performance; Crowding; Optimal size;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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