Why don’t more poor-performing mutual funds run out of money and disappear? There is an interesting NBER paper up that tries to answer this question, and it comes to some thought-provoking conclusions.
We document that the observed persistence amongst the worst performing actively managed mutual funds is attributable to funds that have performed poorly both in the current and prior year. We demonstrate that this persistence results from an unwillingness of investors in these funds to respond to bad performance by withdrawing their capital. In contrast, funds that only performed poorly in the current year have a significantly larger (out)flow of funds/return sensitivity and consequently show no evidence of persistence in their returns.
And it ends on this truly discouraging note:
Because the persistence in the bottom decile derives exclusively from seasoned funds in that decile, this persistence results because these funds have lost their highly elastic investors, and so the remaining investors do not respond adequately to the bad performance.
Apparently some people just give up on their money. To use the academic-ese, they “do not respond adequately to bad performance”, no longer bothering to look anymore as a consistently poor-performing fund manager invests their money inexorably to zero.