Abstract: Through an analysis of 51 open-end funds as well as 126 stocks heavily held by these funds from December 2004 to March 2007 on Shanghai and Shenzhen Stock Exchanges,this paper investigates the momentum behavior and performance of open-end fund managers in China and tries to explain the source of profitability of the momentum trading strategy. We find that most of the open-end fund managers in China tend to adopt the momentum trading strategy,which buys stocks that have performed well in the past and sells stocks that have performed poorly in the past. We find that open-end fund manager tends to under-react to firm-specific information,while overreact to relative return momentum. Based on the foundational assumption in economics that people are rational,we offer an agency-based explanation to support the economic rationale for momentum in return.

Key words: open-end fund, momentum, trading behavior