Ch.10 · Benchmarks and Performance Evaluation · hard
What is the 'dilution effect' in mutual funds related to AUM growth?
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EXPLANATION
Dilution of performance is a real concern for large funds. As AUM grows: (1) Impact costs increase for large orders; (2) Small/mid cap opportunities become inaccessible without moving prices; (3) Fund must hold more stocks, diluting the best ideas. Many small/mid cap funds have closed for fresh investments (soft closure) when AUM grew too large, to protect existing investors.
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