Financial Markets and Portfolio Management

, Volume 29, Issue 1, pp 1–20 | Cite as

Fund performance and subsequent risk: a study of mutual fund tournaments using holdings-based measures

  • Aymen Karoui
  • Iwan MeierEmail author


The tournament hypothesis of Brown et al. (J Finance 51(1):85–110, 1996) posits that managers of poorly performing funds actively increase portfolio risk in the second half of the year. At the same time, it is a well-established fact that stock returns and the subsequent return standard deviation are negatively related. We propose a decomposition of fund return standard deviation for the second half of the year using holdings-based measures to distinguish between risk changes that result from holding the portfolio and those that are due to managers’ trades. We extend the return gap of Kacperczyk et al. (Rev Financ Stud 21(6):2379–2416, 2008) to the return standard deviation dimension and define the volatility gap as the difference between fund return volatility and buy-and-hold portfolio volatility. Our empirical findings show that changes in the return volatilities of equity mutual funds are largely explained by shifts in buy-and-hold portfolio volatility. Thus, we find only weak evidence of tournament behavior among mutual funds.


Mutual funds Tournament Risk shifting Holdings-based measure 

JEL Classification

G11 G12 G14 



This paper has benefited from the comments of Zhi Da, Raman Kuma, Nicolas Papageorgiou, Bruno Rémillard, Xiaolu Wang, Gong Zhan, and participants at the Northern Finance Association 2010 Conference in Winnipeg and the Eastern Finance Association 2010 Meetings in Miami Beach. We thank an anonymous referee for very helpful comments.


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Copyright information

© Swiss Society for Financial Market Research 2015

Authors and Affiliations

  1. 1.Department of Finance, School of ManagementUniversity of Québec at MontréalMontréalCanada
  2. 2.Department of FinanceHEC MontréalMontréalCanada

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