Are Mutual Fund Manager Skills Transferable to Private Funds?, a paper co-authored by our school’s Assistant Prof. Wu Kai, Prof. Huang Ying from the School of Management, Zhejiang University, and Prof. Liang Bing from the University of Massachusetts Amherst, was officially accepted by International Review of Economics and Finance, a world-renowned journal on finance.
The effect of work experience on productivity has been extensively studied in the field of economics. Finance literature has found that the investment performance of mutual fund managers is related to their characteristics and past work experiences. Mutual fund managers exploit the information advantage they acquired in other industries before joining fund management and then allocate a disproportional amount of stocks from industries where they have experience. The investment skills of fund managers are also related to their past work experience. However, industry-specific experience may not have positive effects on the performance of fund managers. For instance, the underperformance of experienced hedge fund managers is found to be driven by their propensity to reduce risk concerning personal wealth, current income, and reputation, should their funds fail. Another reason is that manager skills are the combined result of collective efforts by managers and fund companies. Therefore, whether work experience in mutual funds affects the performance of fund managers in another asset management industry remains an empirical question.
This paper evaluates how work experience in mutual funds affects manager skills after they switch to private funds. Using a proprietary Chinese private fund database from 2012 to 2016, the authors find that, despite their work experience in mutual funds, switched private fund managers significantly underperform compared with their peer managers in private funds. In particular, the investment skills of smart managers with superior track records in mutual funds deteriorate after the career switch. Moreover, the reduction in skills of smart managers is mainly attributable to the loss of corporate research support in private funds. Research findings demonstrate that the skill sets of mutual fund managers are hardly transferable to the private fund industry.
