Fund Returns and Trading Expenses: Evidence on the Value of Active Fund Management
The relation between mutual fund returns and trading expenses provides a powerful test of the value of active management, however, the empirical evidence on this relation is mixed. It argues that the inconsistent evidence stems from the use of turnover as a proxy for trading expenses. Turnover captures the frequency of trade but it fails to account for the cost per trade ? which varies considerably across assets. It estimates funds? trading expenses directly using portfolio holdings and transaction data and find that fund managers fail to recover the cost of transacting.