Termination Risk, Multiple Managers and Mutual Fund Tournaments

This study analyzes the risk-taking behavior of mutual funds in response to their relative performance over the 1992 to 1999 period. Our results show that managers of funds whose performance is closer to that of the top performing funds have greater incentives to increase their portfolios' risk than managers at the top who exhibit a tendency to lock in their positions. The evidence suggests that termination risk imposes a constraint on the risk taking behavior of under-performing fund managers and the winner takes all phenomenon generates a strong incentive for the fund managers to be the top manager. We also analyze the difference in the risk taking behavior of funds managed by multiple managers and single managers.