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A relatively recent literature that focusses on the fund industry often pinpoints governance issues. Most funds seem to underperform correct model-based benchmarks such as the Fama-French 4-factor model estimated for the respective investment fund. Sensoy (2009) indicates that most benchmarks are not correct. There is also evidence that management companies, managing families of funds subsidize often better performing funds at the disadvantage of less performing funds that also tend to have less sophisticated investors and thus face a less elastic flow-performance relationship (Bhattacharya et al. (2012)).
The convexity of the flow-performance relationship actually creates incentives for such behaviour. The cost structures of the fund industry also exhibit interesting...
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