On Tournaments and Seasonality in Mutual Fund Performance

Abstract

We document a strong systematic component in the aggregate underperformance of active mutual funds. On average, active funds underperform the market and other benchmark portfolios only in the first month of a quarter. This intra-quarter pattern remains significant across fund size and investment style categories. It bears limited to no relationship to NAV-inflation or window dressing practices, systematic time variation in microstructure biases, investors’ flows or cash distributions. Our findings pose a challenge to existing explanations of the mutual funds’ underperformance puzzle.