Actively Managed Equity Mutual Funds in Emerging Markets
Abstract
We analyze the performance of mutual fund managers operating in emerging markets. Emerging stock markets differ from mature markets in ways — weak enforcement of insider-trading rules, poor corporate governance, low liquidity — that create inefficiencies active strategies can exploit. We evaluate conditional alphas and multiple liquidity measures for equity funds targeting emerging markets. Smaller funds are significantly affected by liquidity, and conditioning on public information meaningfully shifts the distribution of returns. We find evidence of positive abnormal returns: active management in emerging markets can be profitable.
Key conclusions
Smaller funds face substantial constraints from liquidity shocks in emerging economies. By conditioning strategies on public information and navigating these inefficiencies, active managers can achieve statistically significant positive alphas — active management remains viable outside mature markets.