First‐Mover Advantage Among Direct Investors Holding Overlapping Positions and the Regulation of Mutual Funds

ABSTRACT Accelerating mutual fund outflows following poor past performance have been attributed to an investor first‐mover advantage inherent in mutual fund structure. We show that direct investors, who hold very similar portfolio assets through a common separately managed account strategy, exhibit similar behavior following poor portfolio returns, but their behavior is driven by a first‐mover advantage at the asset level, reflecting competition for limited market liquidity and concerns about depressed asset values. Benchmarking mutual fund investor behavior with that of direct investors in matched separately managed accounts, we find no evidence that poor fund performance accelerates fund outflows. These results have important implications for our understanding and regulation of the mutual fund industry.