Fund Tournaments and Asset Bubbles

This article studies how fund managers' relative-performance concerns affect their investment strategies in bubble periods. The managers compete for flows that are sensitive to their performance ranking. Severe ranking tournaments with highly convex flow-performance relationship lead managers to ride bubbles to outperform each other, making bubbles long-lived. However, moderate tournaments may lead them to attack bubbles quickly. The results are consistent with the observed cross-sectional variation in funds' investment strategies in bubble periods. Bubble-riding behavior is pronounced if the funds' tournament is too close to call, as interim followers try to catch up while interim leaders try to stay ahead.