Does fund size erode mutual fund performance? The role of liquidity and organization

Joseph Chen, Harrison Hong, Ming Huang, Jeffrey D. Kubik

Research output: Contribution to journalArticlepeer-review

645 Scopus citations


We investigate the effect of scale on performance in the active money management industry. We first document that fund returns, both before and after fees and expenses, decline with lagged fund size, even after accounting for various performance benchmarks. We then explore a number of potential explanations for this relationship. This association is most pronounced among funds that have to invest in small and illiquid stocks, suggesting that these adverse scale effects are related to liquidity. Controlling for its size, a fund's return does not deteriorate with the size of the family that it belongs to, indicating that scale need not be bad for performance depending on how the fund is organized. Finally, using data on whether funds are solo-managed or team-managed and the composition of fund investments, we explore the idea that scale erodes fund performance because of the interaction of liquidity and organizational diseconomies.

Original languageEnglish (US)
Pages (from-to)1276-1302
Number of pages27
JournalAmerican Economic Review
Issue number5
StatePublished - Dec 2004

ASJC Scopus subject areas

  • Economics and Econometrics


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