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Threshold Effect of Scale and Skill in Active Mutual Fund Management

Chong, Terence Tai Leung and Lee, Nayoung and Sio, Chan-Ip (2018): Threshold Effect of Scale and Skill in Active Mutual Fund Management.

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Abstract

In this paper, we apply threshold estimation techniques to study the size-performance relation in the US mutual fund industry. The existing studies have found diseconomies scale, and we add our contribution to this by considering possible non-linear decreasing returns to scale caused by fund age and manager tenure. We find significant threshold effects of both fund age and manager tenure at approximately three to four years in the size-performance relation. Compared with younger funds, older funds have severe decreasing returns to scale as the industry size increases.

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