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Mutual Fund Tournament : Risk Taking Incentives Induced by Ranking Objectives

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  • Goriaev, A.P.

    (Tilburg University, Center For Economic Research)

  • Palomino, F.A.

    (Tilburg University, Center For Economic Research)

  • Prat, A.

    (Tilburg University, Center For Economic Research)

Abstract

There is now extensive empirical evidence showing that fund managers have relative performance objectives and adapt their investment strategy in the last part of the calendar year to balance their performance in the early part of the year. However, emphasis was put on returns in excess of some exogenous benchmark return. In this Paper, we investigate whether fund managers have ranking objectives (as in a tournament). First, in a two-period model, we analyse the game played by two risk-neutral fund managers with ranking objectives. We show that ranking objectives provide incentives for an interim loser to increase risk in the last part of the year. In the second part of the Paper, we test some predictions of the model. We find evidence that funds ranked in the top decile after the first part of the year have risk incentives generated by ranking objectives and that risk induced by ranking objectives is mainly systematic.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Goriaev, A.P. & Palomino, F.A. & Prat, A., 2000. "Mutual Fund Tournament : Risk Taking Incentives Induced by Ranking Objectives," Discussion Paper 2000-94, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:41aeada1-3d53-4828-bfae-2e32b60baf00
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    References listed on IDEAS

    as
    1. Huddart, Steven, 1999. "Reputation and performance fee effects on portfolio choice by investment advisers1," Journal of Financial Markets, Elsevier, vol. 2(3), pages 227-271, August.
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    More about this item

    Keywords

    investment trusts; financial management; financial risk; performance;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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