A Study On The Relationship Between The Performance And Scale Of China 's Stock Open Funds

Using detailed stockholdings for a comprehensive sample of China open-ended actively managed equity funds from2004to2012, the paper closely examine the role of liquidity on the relation between fund performance and fund scale after controlling multiple fund characteristics variables. In order to fulfill the research objective, the paper invented three suitable liquidity measures to illustrate the liquidity impact from the aspects of fund management, fund stockholdings and market shocks caused by trading of funds.The paper finds a significant inverse relation between fund size and fund performance which is adjusted by the Fama-French three factor to exclude the market anomalies. This inverse relation is stronger among the funds with lower liquidity levels. The liquidity measures turn out to be effective as they have profound implications and provide a good description of the liquidity characteristics.Larger funds can hold stocks with large capitalization and decentralize its investment to improve its internal liquidity in the aspects of fund management and fund stockholdings, so as to avoid fund size eroding the performance. However, the external liquidity problems caused by market impact of trading of funds stay still when the fund size grows larger even though the fund management deliberately improve the internal liquidity and finally erode the fund performance.