Abstract

This paper examined the influence of relative performance ranking on portfolio managers’ risk adjustment strategy by a comparative study of extreme close-end funds and open-end extreme funds in China. Firstly, it demonstrates that both of them have similar risk adjustment strategy. Portfolio managers who are interim losers are not likely to increase fund risk levels in the latter part of the assessment period, while interim winners are not likely to decrease the volatility. Secondly, as an important character, fund managers’ turnover has no influence on their risk adjustment strategy, which indicates that fund company rather than portfolio manager by himself is essentially in charge of the fund investment strategy. The turnover is “old wine in new bottle”. Portfolio turnover is essentially rotation inside the fund companies, which is difficult to have sufficient pressure on fund managers.

Key words: Tournaments, portfolio managers, incentive, risk adjustment strategy.