On the Style-based Feedback Trading of Mutual Fund Managers

This paper examines style-based feedback trading behavior of US domestic equity mutual fund managers. As such, we provide an empirical extension to the theoretical model for style switching behavior of Barberis and Shleifer (2003). We find strong evidence for style-based feedback trading : nearly 76% of the funds in our sample engage in style switching, half of which engage in positive (negative) feedback trading. There is evidence for “twin-style” switching: capital is channeled between value and growth, and between large cap and small cap funds. Overall, we find that growth funds tend to behave more as positive feedback (momentum) traders, whereas value funds tend to behave more as negative feedback (contrarian) traders. We find that funds that engage more aggressively in style switching tend to be younger and have higher total expense ratios. There is substantial time variation in the average tendency to switch, though there is persistence in the switching at the fund level. Finally, linking the style switching behavior of fund managers to risk-adjusted performance, we find that positive (negative) feedback trading yields positive (negative) alpha. Twin-style switching, however, does not benefit performance.