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Strategic Mutual Fund Tournaments

Published online by Cambridge University Press:  04 September 2025

Joseph Chen Open the ORCID record for Joseph Chen [Opens in a new window] ,
Eric Hughson  and
Neal Stoughton
Joseph Chen*
Affiliation:
University of California Davis Graduate School of Management
Eric Hughson
Affiliation:
Claremont McKenna College
Neal Stoughton
Affiliation:
WU Vienna University of Economics and Business, University of Waterloo School of Accounting and Finance
*
chenjs@ucdavis.edu (corresponding author)
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Abstract

We characterize optimal mutual fund risk-taking strategies in competitive multi-period tournaments among multiple players. With multiple competitors, every player begins by taking maximum risk. In the final period, all players continue to take maximum risk except the leading player, who employs a “lock-in” strategy that depends on the magnitude of the lead. Our theory predicts the leader should strategically lock in advantage by reducing risk-taking if and only if the lead is great enough, rather than an increase in risk-taking by the trailers to try to catch up. Empirical evidence from style-adjusted mutual fund tournaments provides strong and robust support.

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Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 36
Copyright
© The Author(s), 2025. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

This paper has benefitted from the comments of Jonathan Berk, Francesco Franzoni, and Richard Smith, and has been presented in seminars at Arizona State University, Claremont McKenna College, the Cologne Financial Markets Symposium, FRB Board of Governors, HKUST, Melbourne Business School, Nanyang Technological University, the National University Singapore, the University of Iceland, the University of Michigan, the University of Oregon, UNSW, conference on “Recent Advances in Mutual Fund and Hedge Fund Research” at Humboldt University, and “Workshop in Memory of Rick Green” at Carnegie Mellon University. We appreciate the seminar audiences for their comments. We also appreciate the comments and feedback from Hendrik Besembinder and Jeffrey Coles, the editor and referee, respectively, of the Journal of Financial and Quantitative Analysis.

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