Portfolio concentration and the fundamental law of active management

In this paper Joop Huij from the Rotterdam School of Management, Erasmus University and Jeroen Derwall from Tilburg University, School of Economics show the observed relation between portfolio concentration and performance is mostly driven by the breadth of the underlying fund strategies, not just by fund managers’ willingness to take big bets.

The results indicate that when investors strive to select the best performing funds, they should not only consider fund managers’ tracking error levels. It is of greater importance that they take into account the extent to which fund managers carefully allocate their risk budget across multiple investment strategies and have concentrated holdings in multiple market segments simultaneously.

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