Fund tournaments and style drift

This paper examines how Chinese mutual funds actively alter the style drift of their top ten holdings in response to past performance in annual tournaments from the three dimensions: size, value, and momentum. Using a sample of equity funds from 2006 to 2023, we find that poorly performing funds in the first three quarters tend to increase their style drift activities in the last quarter. For different dimensions of style drift, we find that simply increasing size drift can improve the performance and ranking of a trailing fund and reduce the risk of the fund's net value crash. The evidence suggests that the intentional shifts in size drift are skilled. In addition, we find the better consequences of size drift change to be particularly pronounced for tournament funds with high activeness. •We examine how Chinese funds alter their top ten stocks' style drift in response to past performance in annual tournaments.•Poorly performing funds in the first three quarters will increase style drift in the last quarter.•Style drift adjustment behavior shows asymmetric responses to bottom and top performance.•Increasing size drift improves trailing funds' performance and reduces their net value crash risk.•Better outcome of size drift change is particularly significant for tournament funds with high activeness.