Mutual Fund Tournaments: Do Mid-Year Winners Still Compete?

Abstract

No consensus has emerged from previous studies on the risk-taking behavior of mutual fund managers in response to their relative performance. However, a number of authors commonly view the mutual fund industry as having a yearly tournament. Some managers have ranking objectives: they tend to tweak their risk levels in the second part of the year according to their performance at mid-year. If there is tournament behavior among mutual fund managers, the best way to see it should be to look at those funds that have a chance of winning. Using U.S. domestic equity fund data from 1999 through 2009, the authors find that managers with the best performance at mid-year indeed have this behavior. Furthermore, the results imply that larger mid-year risk shifting is related to higher cumulative return in the second part of the year. There is not enough evidence, however, on whether risk shifting helps improve fund cumulative return over the entire year.