Journal of Risk

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Fund size and the stability of portfolio risk

Martin Ewen and Marc Oliver Rieger

  • Portfolio size matters for the stability of risk numbers of portfolios consisting of financial assets.
  • This finding holds for dispersion (volatility) and tail risk measures (VaR, expected shortfall).
  • The effect is robust for balanced and fixed income portfolios, but not for equities. In line with former research, this suggests that equity managers simply scale their current investment selection up as they grow.
  • We find indications that larger portfolios have smaller differences between tail risk and dispersion risk measures.

This paper examines the relationship between portfolio size and the stability of mutual fund risk measures, presenting evidence for economies of scale in risk management. In a unique sample of 338 fund portfolios, we find that the volatility of risk numbers decreases for larger funds. This finding holds for dispersion as well as tail risk measures. Further analyses across asset classes provide evidence for the robustness of the effect for balanced and fixed-income portfolios. However, a size effect did not emerge for equity funds, suggesting that equity fund managers simply scale their strategy up as they grow. Analyses conducted on the differences in risk stability between tail risk measures and volatilities reveal that smaller funds show higher discrepancies in that respect. In contrast to the majority of prior studies on the basis of ex post time series risk numbers, this study contributes to the literature by using ex ante risk numbers based on the actual assets and de facto portfolio data.

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