Mutual Fund Management
Sunday, Jan. 8, 2017 1:00 PM – 3:00 PM
- Chair: Marcin Kacperczyk, Imperial College London
Mutual Fund Flight-to-Liquidity
AbstractThis paper examines the liquidity choices of mutual funds during times of market
uncertainty. I find that when markets are uncertain, mutual funds actively increase the liquidity of their portfolio - often referred to as a `flight-to-liquidity.' In aggregate,
mutual fund behaviour has implications for the market; the market driven flight-toliquidity
places upward pressure on the liquidity premium. I examine the underlying mechanisms driving fund behaviour. I show that market volatility is associated with lower fund performance and withdrawals, which causes funds to adjust the composition of their portfolio towards more liquid assets in order to meet potential redemptions. This causal chain is consistent with Vayanos (2004), who argues that fund managers are investors with time-varying liquidity preferences due to threat of withdrawal. Aggregated over funds, the effect is substantial: a one standard deviation increase in my measure of flight-to-liquidity yields a 0.63 standard deviation increase in the excess return required for holding illiquid securities.
Why Do Institutions Delay Reporting Their Shareholdings? Evidence From Form 13F
AbstractInstitutional investors are allowed to delay their disclosures of quarter-end holdings via form 13F for up to 45 days. This forbearance may help protect the institutions from potentially damaging behavior by other traders, in particular from free-riding copycatters and from front-runners. It also may help the institutions hide their voting power, and this has prompted public corporations to request a much shorter maximum reporting lag. We look at 14 years of 13F filings to gauge the role of these three motives in the decision to delay disclosure, and the results indicate that front-running and voting, but not copycatting, motivate delays.
A Dynamic Theory of Mutual Fund Runs and Liquidity Management
AbstractI develop a model of an open-end mutual fund that invests in illiquid assets and show that shareholder runs can occur even with a fully flexible fund NAV. The key is the fund’s dynamic management of its cash buffer. Holding more cash at time t helps the fund avoid fire sales of its illiquid assets if it experiences a significant net outflow. However, the need to rebuild the cash buffer at time t + 1 after outflows at t implies predictable sales of illiquid assets and hence a predictable decline in NAV. This generates a first-mover advantage at t, leading to shareholder runs. This mechanism differs from that underlying bank runs, which relies on fixed-NAV claims. I then study the fund’s optimal dynamic cash policy in the presence of run concerns, which gives rise to the following tension. Rebuilding the cash buffer more rapidly at t + 1 can trigger runs at t. However, lack of cash re-building makes the fund more likely to suffer another round of fire sales in the future. This tension is aggravated by a time-inconsistency problem: the fund may want to pre-commit to a less rapid cash re-building policy to avoid runs but cannot credibly convince the shareholders absent a commitment device. Therefore, despite optimal liquidity management, mutual funds are not run-free and runs can lead to higher ex-ante fire sale losses. Appropriate design of policies aiming at reducing financial stability risks of mutual funds requires taking into account the dynamic interdependence of runs and liquidity management.
- G1 - Asset Markets and Pricing