International Journal of Business and Social Science Vol. 1 No.2; November 2010 89 The Mediating Effects of Risk Tolerance on Fund Performance Fauziah Mahat* Annuar Md Nasir Noor Azman Ali Faculty of Economics and Management Universiti Putra Malaysia E-mail: fauziah@econ.upm.edu.my * Abstract Risk tolerance in fund performance is a topic which is of enormous interest not only to researchers all over the world, but also to investors. Motivated by limited empirical studies on the effects of risk tolerance on fund performance in Malaysia and in response to reasonable gaps in the literature, the objective of this paper is to examine the mediating effect of individual fund manager risk tolerance (IFMRT) measured as level of confidence (LOC) and level of risk tolerance (LORT) as these mediate on the individual fund manager characteristics (IFMC) and fund performance (FP) relationship. The fund performance measures in this study use Sharpe (FPS), Treynor (FPT)m and Jensen (FPJ) ratios. The results indicate a weak linear correlation between individual fund manager characteristics and level of confidence, and also between individual fund manager characteristics and level of risk tolerance. Simultaneously, when the level of confidence and level of risk tolerance is added in the individual fund managers and fund performance relationship, it shows that the LORT variable acts as a mediator between IFMC and FP but LOC does not act as a mediator between IFMC and FP. Keywords: Fund Performance (FP), Individual Fund Manger Risk Tolerance (IFMRT), Level of Confidence (LOC), Level or Risk Tolerance (LORT). Introduction Fund management industries represent one of the most dynamic parts of global financial services. Fund management is growing fast and the number of available funds is greater than the number of stocks on the market (Peterman and Lai, 2009). As fund management industries have expanded enormously, so does literature explaining the instability of fund flows and their fund allocation in the capital market. However, there is lack of discussion on the effects of risk tolerance on the financial performance of the emerging financial markets in developed countries. Fund Management industries in Malaysia have gradually developed with other sectors of the capital market since 1980s.The financial system has undergone significant transformation since 1990s to meet the needs of an expanding economy and changing market demands. Table 1 shows total funds managed by licensed fund management companies in Malaysia, as at 31 December 2009, which had risen by 40.9% to 315.0 billion as compare to 2008 (RM223.5 billion). The statistics include charitable bodies corporate bodies, EPF and EPF contributors, government bodies and agencies, individuals and private pension funds. Insert table (1) about here