Abstract
What economic forces limit mutual fund managers from generating consistent outperformance? We propose and test the hypothesis that competition from other funds catering to similar segments of investor demand limits alpha persistence. We make three contributions. First, we use spatial methods to identify the dynamic competition faced by funds. Second, we develop a new measure of skill, which is the ability of a fund to beat its spatially close rivals. Third, we show that performance is persistent only when a fund faces less competition in its style space. This new persistence is economically significant and lasts for over four quarters.
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