This paper examines the relationship between performance and risk exposure for mutual funds. The preliminary analysis fails to support the tournament hypothesis, which predicts that poorly performing managers will increase risk exposure while outperforming managers will decrease risk exposure. Instead, we find evidence of risk reduction for extreme losers and risk increase for winning managers. Besides, the risk-taking fails to align manager interest with shareholder interest since the returns from the risk enhancement by winners and the risk reduction by losers is relatively worse than those with contradictory strategies. Overall, the competition among fund managers appears to affect management risk choice, and in turn has an effect on future performance. However, the effect of shifting risk on fund performance and the approach of altering portfolio risk vary with fund style and prior performance.

Keywords: mutual fund, tournament hypothesis, risk-taking, fund performance