| This dissertation aims to contribute to our understanding of the performance of investment funds. It consists of two essays.;In the first essay, I propose a parsimonious model that reproduces the negative risk-adjusted performance of actively managed mutual funds and the funds' systematically better performance in bad states of the economy. In the model, a fund manager can generate state-dependent active returns at a disutility. Negative expected performance and mutual fund investing simultaneously arise in equilibrium because the fund's optimal active return covaries positively with a component of the pricing kernel that the performance measure omits. Using data on U.S. funds, I document empirical evidence consistent with the model's predictions.;In the second essay, Richard C. Green and I propose a simple model that rationalizes performance persistence in private equity partnerships. In contrast to the model for mutual funds of Berk and Green (2004), the learning in our model pertains to profitability associated with an emerging sector or an innovative trading strategy, rather than ability specific to the fund manager. As a result of potential information spillovers, which would increase competition in the sector if informed investors were to partner with non-incumbent managers, incumbent managers will let informed investors benefit from increases in estimated profitability following high realized returns in the sector. |
