Crowding : Evidence from Fund Managerial Structure

Over the past 30 years, there has been a striking evolution in fund management structure with team-managed funds growing from 30% of funds to over 70% today. While much attention is focused on fund performance, our paper presents evidence that this transformation is likely a response to crowding: adding new managers brings fresh investment ideas meaning any particular idea is less likely to be crowded. Our results show that funds that transition from solo to team management have less concentrated portfolios and lower decreasing returns to scale. Consistent with the crowding of ideas, we show that diversification of team skills is important for reducing the impact of fund size on performance. We also find that the performance of managers that employ systematic investment processes are not as sensitive to inflows suggesting that discretionary managers with a limited number of ideas are more likely to run into capacity constraints