Faculty & Research

Abstract

The rapid growth of the mutual fund industry in recent decades is accompanied by the concern of uninformative competition and crowded trades on popular investment strategies. We empirically investigate the effect of fund competition on performance in light of this issue, and cast our analysis in the context of a popular fund strategy based on the post earnings announcement drift (PEAD) anomaly. We find that a general measure of competition among all funds does not affect the performance of funds aggressively chasing PEAD; however, strategy-specific competition among funds aggressively trading on PEAD has a significantly negative impact on fund performance. Further, amid increased competition, there is also increased diversity in the sophistication of implementing the strategy. A sizeable group of “smarter” funds aggressively pursue the strategy, yet successfully avoid crowded trades and generate superior performance. The identities of these funds are highly persistent. Our findings suggest competition at work in the financial market, and the existence of adaptive evolution by some funds in the presence of competition.