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Mutual Fund Trading and Performance

Paper Session

Friday, Jan. 7, 2022 10:00 AM - 12:00 PM (EST)

Hosted By: American Finance Association
  • Chair: Veronika Pool, Vanderbilt University

Forced Sales and Dealer Choice in OTC Markets

Sergey Chernenko
,
Purdue University
Viet-Dung Doan
,
Purdue University

Abstract

Using novel data on the trades of municipal bond mutual funds and daily fund flows, we study how funds trade in response to outflows. When forced to sell bonds to satisfy redemptions, funds prearrange fewer trades, sell more liquid bonds, and trade with more central dealers, who offer faster execution. This is especially the case when funds have low cash buffers, when trading lower rated bonds, and when trading after periods of aggregate outflows. More central dealers are found to charge higher markups when funds demand fast execution.

Quantitative Investing and Market Instability

William Beggs
,
University of San Diego
Jonathan Brogaard
,
University of Utah
Austin Hill-Kleespie
,
University of North Texas

Abstract

The 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

Ron Kaniel
,
University of Rochester
Pingle Wang
,
University of Texas-Dallas

Abstract

Utilizing 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

Richard Evans
,
University of Virginia
Miguel Ferreira
,
Nova School of Business and Economics
Pedro Matos
,
University of Virginia
Michael Young
,
University of Missouri

Abstract

As 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.
Discussant(s)
Jennie Bai
,
Georgetown University and NBER
Mikhail Simutin
,
University of Toronto
Dong Lou
,
London School of Economics
Elisabeth Kempf
,
University of Chicago
JEL Classifications
  • G1 - Asset Markets and Pricing