The long-run success of mutual funds

This paper investigates the long-run nature of a market populated by heterogeneous asset managers that must compete for investment capital. For market conditions similar to those of U.S. equity markets the optimal amount of portfolio riskiness is computed if a manager desires to maxi-mize the average assets under management of a fund. The framework also allows for the study of the distribution of assets across investment compa-nies. It is demonstrated that in conditions similar to those of U.S. equity markets maximizing a fund’s average AUM entails holding significantly more risk than that of the market portfolio. ∗This is a preliminary draft. Please do not cite without permission. I am grateful t