How do fund families utilize the fund performance evaluation system? : Study on the ‘Evaluation-ship Bias’ in Korean equity funds

This paper shows how the fund performance evaluation system influences the fund market and fund family behaviors. Evaluation-ship Bias is defined as the outperforming of evaluated funds over non-evaluated funds. Regarding the Evaluationship Bias, this study confirmed two things in empirical analysis of Korean equity funds. First, this paper verified that there was Evaluation-ship Bias in Korea, so fund families’ performances were over-estimated. Second, it is also found that fund families did favoritism to evaluated funds in management activities. Fund families were more attentive to EV performance and took strategic and risk-taking measures to improve its ratings. This paper suggests that another factor, the performance evaluation system itself, is what causes fund families to favor some funds. The existence of too high numbers of Korean funds is an example of this evaluation system bias. We can expect similar phenomena to occur in other countries as well. We also suggest that the introduction of GIPS will diminish the evaluation system bias and contribute to the development of the Korean fund market.