Mutual Fund Trading and Performance
Friday, Jan. 7, 2022 10:00 AM - 12:00 PM (EST)
- Chair: Veronika Pool, Vanderbilt University
Quantitative Investing and Market Instability
AbstractThe May 2010 Flash Crash and August 2007 Quant Meltdown raised concerns about the impact of quantitative investment strategies on market instability. We examine whether quantitative investing dampens or exacerbates market instability by focusing on mutual fund fire sales. We find that quantitative fund fire sales have a much larger impact on market instability than fire sales by traditional mutual funds. For the same magnitude fire sale, quantitative funds’ impact is over eight times as large. The larger impact is due to quantitative funds’ reliance on similar trading strategies and their strategies’ sensitivity to the time-series of returns.
Unmasking Mutual Fund Derivative Use
AbstractUtilizing new SEC data enabling us to compute performance of mutual funds' derivative positions, we study how funds use derivatives and how derivatives contribution to performance. In contrast to prior research concluding derivatives are used for hedging, we find most active equity funds use derivatives to amplify market exposure by buying index derivatives, underperform, yet receive more flows. Hedging funds, the minority, in contrast utilize single stock derivatives. Despite small portfolio weights, derivatives significantly impact funds' leverage and contribute largely to returns and cross-sectional differences in returns. Swaps, ignored by prior studies, are especially important in explaining cross-sectional differences in derivative contributions. In response to the COVID-19 pandemic outbreak, funds trade more heavily on short derivative positions, a pattern driven by managers for which the risk of recession is likely more salient. Amplifying funds suffer a double whammy. While they shift strategies, they are slow to react and experience similarly large losses to nonusers in the outbreak. By the time they shift, the market has already started to rebound, and they lose on their short positions.
Hiding in Plain Sight: The Global Implications of Manager Disclosure
AbstractAs the potential for agency conflicts have long been present in delegated asset management, over time regulators have pushed for increased disclosure in an effort solve these potential issues. Given the constant push for disclosure, we examine a clear potential source of agency conflicts present in the mutual fund industry: anonymous fund managers. Using a global sample of mutual funds, we find that 17% of global mutual funds, excluding the US, and 22% of emerging market funds do not disclose the name of their management team. Anonymously managed mutual funds significantly underperform, have lower active share, return gap, tracking error, and higher r2 than funds with named managers (solo and team managed). They are more frequent in families with more cooperative structures, bank affiliated funds, and common law countries. Conversely, managers are more likely to be named in funds affiliated with investment banks, countries with more disclosure requirements in securities markets, and cultures that place higher emphasis on individualism. Further examining fund performance and activity around changes in SEC disclosure regulation, we find that both performance and fund activity increases following new regulation that required disclosure of manager names. This is important, as it provides evidence that the underperformance of anonymous teams is related to the disincentive brought on by anonymous management, and not solely due to less skilled managers being kept anonymous.
Georgetown University and NBER
University of Toronto
London School of Economics
University of Chicago
- G1 - Asset Markets and Pricing