Mutual Funds and Bubbles

An academic study from INSEAD Department of Finance, Mutual Funds and Bubbles: The Surprising Role of Contractual Incentives, explores "one of the potential causes of the financial market bubble of the late 1990s: herding behavior of mutual funds." The study found that found that performance incentives had a strong positive influence on fund managers' performance. From the abstract: "We argue that the incentives embedded in the compensation induce managers to overcome their tendency to herd. We explain that investing in bubble stocks amounts to herding, and in this case, contracts with high incentives induce managers to diverge from the pack, thus reducing their holding of bubble stocks." The complete study can be downloaded from the web site.

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(May '04-Jun '05)