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The Birth and Death Processes of Mutual Funds

David Blake and Allan Timmermann


Using a large sample containing the complete returns history of 2300 UK
open-ended mutual funds over a 23-year period, we characterize the
funds' birth and death processes. For the funds that died during the
sample, we report an economically and statistically very significant
underperformance that intensifies as the termination date approaches.
Following the inception date, there is, in contrast, evidence of a small,
short-lived outperformance for funds investing in domestic equities.
We document an important duration dependence in the closure of mutual
funds. The hazard function of the included funds is found to be inverse
U-shaped, implying that the closure probability of a fund is lowest when
it is either very young or very old.