Trading frequency and fund performance

In sharp contrast to prior findings on the trading performance of individual investors, we find a strong positive relation between trade frequency and performance among a large sample of institutional investors. The positive performance of institutional traders that trade actively persists for at least a year, as they continue to trade actively and generate abnormal returns from their trades. Large funds, however, are unable to overcome the transaction costs associated with their larger trades, a finding that lends insight into the decreasing returns to scale that characterizes the money management industry. Active traders generate performance both by supplying liquidity and by trading aggressively on information.