Mutual Fund Competition, Managerial Skill, and Alpha Persistence

What economic forces limit mutual fund managers from generating consistent outperformance? We propose and test the hypothesis that buy-side competition from other funds matters. We make three contributions in this regard. First, we propose new style-based spatial methods to identify the customized rivals of each fund. Second, we construct dynamic, fund-specific measures of competition and generate measures of skill as a fund's outperformance relative to its customized peers. Finally, we show that funds outperforming their customized rivals generate future alpha when they face less competition. These results are economically significant and last for over four quarters.