Behavior Of Mutual Funds Research Articles

Impact of bank-affiliation on liquidity seeking of foreign mutual funds during adverse shocks: Evidence from China

Using daily shareholding data and event-based measures of composite shocks, we investigate the liquidity-seeking behavior of foreign mutual funds in China that are affiliated with commercial banks, comparing it with the behavior of unaffiliated foreign mutual funds. Fixed effect and panel structural VAR models both reveal differential responses between affiliated and unaffiliated foreign mutual funds. While both types of mutual funds seek liquidity by withdrawing from illiquid, volatile and growth-oriented stocks facing negative shocks, unaffiliated mutual funds exhibit a higher degree of liquidity seeking, consistent with the results of bank-affiliated funds providing liquidity stability. This finding is robust to the selection of shock periods and measurements. The evidence shed new lights on the liquidity management of open-end foreign mutual funds in emerging markets.

The Asymmetric Effect of Mutual Fund Herding on Price Deviation: Evidence from the Chinese Stock Market

Mutual funds, as significant participants in financial markets, play a crucial role in the formation of asset pricing. The relationship between herding behavior of mutual funds and mispricing has been a subject of intense debate among scholars. In this paper, we investigate the asymmetric impact of mutual fund herding on price deviation and explore the underlying mechanism. In terms of research design, this study selects relevant data on mutual fund holdings and stock trading in the Chinese A-share market from 2010 to 2023, we examine whether herding behavior leads to mispricing, specifically focusing on the asymmetric effects of herding buying and herding selling on stock price deviation from intrinsic value. This study distinguishes the trading direction of mutual fund herding behavior and separately examines the relationship between herding buying behavior and herding selling behavior with stock price deviation. Our empirical findings reveal that buying herding behavior is linked to positive price deviations from intrinsic value. However, selling herding behavior shows no significant relationship with price deviation. Furthermore, our results provide evidence that the herding buying of mutual funds stimulates similar trading sentiments among other market participants and contributes to the formation of market bubbles, while herding selling prompts counterbalancing trades, mitigating the impact of price deviation.

The investment behavior of China-connected mutual funds in the pandemic: Information advantage through operational link

Focusing on the origination of the COVID-19 outbreak in China, we examine the risk-taking behavior and performance of U.S. equity mutual funds indirectly exposed to China by holding U.S. firms with operational links to the country. We find that China-connected funds are associated with lower risk and higher abnormal returns at the outbreak of the pandemic. The information advantage underlying the outperformance of these funds is reflected in their trades being mimicked by that of other funds, and in the superior timing and stock picking ability of managers. These funds also maintain higher stock liquidity positions and better portfolio diversification during the pandemic. We further identify that fund managers' ethnic origin is the underlying channel for the outperformance of China-connected funds. Our results are robust across a wide range of tests.

Asymmetry risk and herding behavior: a quantile regression study of the Egyptian mutual funds

PurposeThis paper deeply investigates the herd behavior of the Egyptian mutual funds under changing and different conditions of the market pre- and post-events and compares the impact of asymmetric risk conditions on the herding behavior of the Egyptian mutual funds in both up and down markets.Design/methodology/approachWe test for the existence of herding for the whole period from 2003 to 2022, as well as for the pre-and post-different Egyptian uprising periods. We employ two well-known models, namely the cross-sectional standard deviation (CSSD) and cross-sectional absolute deviation (CSAD) models. Additionally, we use the quantile regression approach.FindingsWe find that the behavior of mutual funds does not change following the different political and social events. For the whole period, we find evidence of herding behavior using only the model of CSAD in down-market conditions. We generalize our finding to be evidence of the existence herding behavior in different quantiles, under only the down market in specific points’ pre, post or both given events throughout the whole series. Conversely, during the upper market, we show a full absence of herding behavior considering all different quantiles. When the market is down, managers are afraid of the condition of uncertainty, neglecting their own private information, avoid acting independently and consequently, following other mutual funds. When the market is up, managers become rational and act fully independent.Research limitations/implicationsFuture research should delve deeper into the drivers of herding behavior, assess its longer-term effects, develop risk management strategies and consider regulatory measures to mitigate the potential negative impact on mutual fund performance and investor outcomes.Practical implicationsThe study reveals that the behavior of mutual funds remains consistent despite various political and social events, suggesting a degree of resilience in their investment strategies. The research uncovers evidence of herding behavior in both high and low quantiles, but exclusively in down markets. In such conditions of market decline, fund managers appear to forsake their private information, exhibiting a tendency to follow the crowd rather than acting independently.Social implicationsThe study reveals that the behavior of mutual funds remains consistent despite various political and social events, suggesting a degree of resilience in their investment strategies. The research uncovers evidence of herding behavior in both high and low quantiles, but exclusively in down markets. In such conditions of market decline, fund managers appear to forsake their private information, exhibiting a tendency to follow the crowd rather than acting independently. Future research should delve deeper into the drivers of herding behavior, assess its longer-term effects, develop risk management strategies and consider regulatory measures to mitigate the potential negative impact on mutual fund performance and investor outcomes.Originality/valueThe paper investigates the herd behavior of the Egyptian mutual funds under asymmetric risk conditions, the study follows the spectrum of the herding behavior analysis and Egyptian mutual funds, extending the research with imperial analysis of market conditions pre- and post-events including currency floating, COVID-19 and political elections. The study gives substantial recommendations for policymakers and investors in emerging markets mutual funds.

Mining the Short Side: Institutional Investors and Stock Market Anomalies

AbstractThis article investigates the short-side anomaly trading behavior of alternative mutual funds (AMFs) based on their short positions in U.S. domestic equities. In aggregate, AMFs demonstrate the ability to exploit well-documented stock market anomalies on the short side, and the overpriced stocks sold short by AMFs generate significant negative alpha. Further, AMFs’ short-side trades exhibit significant return predictability, which can at least partially derive from their ability to process public information on firm and anomaly characteristics. Finally, AMFs’ short-side anomaly-based trading activity and profitability appear to be more pronounced among the stocks with higher credit risk or dynamic short-selling risk.

The Voting Behavior of Women-Led Mutual Funds

The Voting Behavior of Women-Led Mutual Funds

Mutual funds behavior and risk-adjusted performance in Nigeria

The paper investigates the behavior of mutual funds and their risk-adjusted performance in the financial markets of Nigeria between April 2016 and May 31, 2019, using descriptive statistics, as well as CAPM, Jensen’s alpha, and other risk-adjusted portfolio performance measures such as Sharpe and Treynor ratios, as well as Fama decomposition of return. The descriptive tests revealed that 80.77% of the funds were superior to market returns, while 13.46% were riskier. The market and the fund returns behaved abnormally with asymptotic and leptokurtic characteristics as their skewness and kurtosis varied from the normal requirements. Diagnostically, the normality test by Jacque-Berra showed that the return was not normally distributed at a 1% significance level. The market was more aggressive relative to the funds. The average risk-free rate was 6.75% above the market’s return. The risk-adjusted portfolio returns measured by Sharpe and Treynor ratios showed that 67.31% of the funds underperformed the market compared to 40.38% that outperformed the market using Jensen’s alpha. Fama decomposition of return revealed that the fund managers are risk-averse with 48% superior selection ability and rationally invested over 85% of investors’ funds in schemes with fixed income securities at a given risk-free return that cushioned the negative effects of the systematic and idiosyncratic risks and consequently threw the total returns into positive territories. Overall, the fund managers possessed 52% of inferior selection abilities that only earned 33% of superior risk-adjusted returns and hence, failed to achieve the desired diversification in the relevant period.

Capital supply and corporate bond issuances: Evidence from mutual fund flows

I examine how the investment behavior of bond mutual funds affects corporate financing decisions. Mutual funds that hold a firm’s existing bonds have a high propensity to acquire additional new issuances from the same firm. I utilize this stylized fact to construct a firm-specific bond capital supply measure by aggregating flows from a firm’s existing bondholders. Firms with a higher flow-driven capital supply are more likely to issue bonds, enjoy lower yields, and substitute away from equity financing and bank loans. Information acquisition costs and underwriter relationship likely contribute to the impact of flow-driven capital supply.

Explaining mutual fund behavior through the structure‐conduct‐performance lens

AbstractThis paper examines mutual funds. These are economically important as the largest institutional investors, and form an important principal‐agent relationship as custodians of retirement savings. Despite a huge literature, there is no agreed explanation of mutual fund behavior. This analysis links mutual fund research across disciplines under the structure‐conduct‐performance paradigm (SCP), which is widely used in strategy research to explain firm actions and results. SCP explains mutual fund actions after placing the fund manager at the center of fund operations, where their conduct is driven by structure of markets and the funds management industry. Structural influences on fund managers include unpredictability of markets, the oligopolistic nature of the mutual fund industry, and disengagement of clients. As a result, funds derive income as commission on assets under management, which is sub‐optimal for clients. In addition, fund managers' conduct is driven by their homogeneity and socialization with competitors and investee firms. While the most obvious role of fund managers is construction of investment portfolios, outperformance is not their sole, or perhaps even principal, objective. The SCP lens offers insights into mutual funds of value to fund managers, investors, regulators and executives of investee firms. This paper impounds evidence from real‐world data in theory to offer an actor‐centric perspective of investment which is an archetypal practitioner driven discipline.

Market instability and the size-variance relationship

We show that some key features of the behavior of mutual funds is accounted for by a stochastic model of proportional growth. We find that the negative dependence of the variance of funds’ growth rates on size is well described by an approximate power law. We discover that during periods of crisis the volatility of the largest funds’ growth rates increases with respect to mid-sized funds. Our result reveals that a lower and flatter slope provides relevant information on the structure of the system. We find that growth rates volatility poorly depends on the size of the funds, thus questioning the benefits of diversification achieved by larger funds. Our findings show that the slope of the size-variance relationship can be used as a synthetic indicator to monitor the intensity of instabilities and systemic risk in financial markets.

Institutional Investor Trading Around Auditor's Going Concern Modified Opinions: An Analysis of Mutual Funds and Pension Funds

We contribute to auditing literature by examining trading behavior of mutual and pension funds around first‐time going concern modified opinions (GCMO). We find that mutual funds are significant net sellers of GCMO firms in the period before the GCMO announcement and then decrease their net selling at the GCMO announcement. In contrast, pension funds appear to be less active net sellers in the pre‐GCMO period and then significantly increase their net selling as an immediate response to the GCMO announcement, and then reduce their net selling in the post‐GCMO period. Our net selling results are robust to a battery of additional tests, including alternative specifications of the GCMO event window, using an extended pre‐GCMO benchmark period, controlling for 8‐K and earnings announcements, excluding subsequently bankrupt firms and using change variables in our models. In additional analyses, we find that overall trading volume increases for both mutual and pension funds at the GCMO announcement. Our examination of trading behavior provides initial evidence on differences between these two groups of institutional investors in their trading response to first‐time GCMOs, and enables us to provide a more robust assessment of the information content of GCMOs for these different groups of sophisticated market participants.

Investor Clientele and Style Changing Behavior in Mutual Funds

This paper examines different clienteles’ reactions to style changing behavior of mutual funds. Using the granularity of daily mutual fund data, we show that heterogeneity in investors’ sophistication levels strongly relates to heterogeneity in responses to style changing behavior. The empirical approach that we apply to several proxies of investors’ sophistication level indicates that less sophisticated investors reward style-changing behavior by an increase in fund flow, while more sophisticated investors punish this behavior by redemption. We show that style changing behavior has different impact on various types of fund performance measures. More specifically, style deviation has a strong positive impact on the simple fund performance measures, which are used by less-sophisticated investors, while it has no significant impact on more advanced fund performance measures. Our empirical findings also report that less-sophisticated investors drive the aggregate investors’ reactions to the style deviation. Overall, we argue that a comparison of the fund flow-style changing relationship, by accounting for investor’s sophistication level, allows for a more complete picture of an investor’s response to the changes in mutual funds’ investment style behavior.

Capital Supply and Corporate Bond Issuances: Evidence from Mutual Fund Flows

This paper examines how investment behavior of bond mutual funds affects corporate financing decisions. Mutual funds that hold a firm's existing bonds have a high propensity to acquire additional new issuances from the same firm. I utilize this stylized fact to construct a firm-specific bond capital supply measure by aggregating flows from a firm's existing bondholders. Firms with a higher flow-driven capital supply are more likely to issue bonds, enjoy lower yields, and substitute away from equity financing and bank loans. Information acquisition costs and underwriter relationship likely contribute to the impact of flow-driven capital supply.

Relationship between mutual funds and hedge funds performance in different periods

The hedge fund literature has already shown that hedge funds and mutual funds follow a different strategy. One result of the literature was that mutual funds herd into or out of stocks following the herd of hedge funds one quarter later. The aim of this paper is to find out whether herding behavior of mutual funds have changed after the financial crisis. Our paper compares mutual funds and equity hedge funds in general (not only large hedge funds). The hypothesis is that mutual funds are not herding to equity hedge funds as strong as before the crisis. We use OLS regressions and correlation analysis to test the aforementioned hypothesis. We found that the monthly returns of hedge funds and mutual funds have synchronized in developed markets after the financial crisis. Therefore, the argument that mutual funds herd hedge funds is at least not as strong as before. The improving effectiveness and price informativeness could be an explanation for this changing environment.

The holdings markup behavior of mutual funds: evidence from an emerging market

This paper uncovers a seasonal mutual fund holdings markup pattern in Taiwan’s market. Specifically, we find that fund’s equity holdings jump up significantly at the quarter-ends and year-end while drop back immediately to the previous level in the following month. While the holdings markup pattern found in this paper may look similar to the price markup phenomenon found by Carhart et al. (J Finance 57:661–693, 2002), the mechanism used by fund managers in the performance inflation may be quite different. In specific, while Carhart et al. (J Finance 57:661–693, 2002) document that fund managers use the stocks currently held in their portfolio to mark up the fund performance, we find that fund managers in fact use both the stocks already held in their portfolio and the new stocks to mark up their holdings. Furthermore, Carhart et al. (J Finance 57:661–693, 2002) do not explicitly examine if there exists a holdings markup in addition to the price markup. In this study, we fill this gap by directly exploring the holdings markup behavior by the fund managers. We also identify the specific stock characteristics that fund managers prefer in their holdings markup. In specific, fund managers prefer to trade growth stocks, stocks with larger market capitalization, higher institutional ownership, higher quality of earnings, and stocks in the high-tech industry, to inflate the fund performance. We also find that fund managers tend to avoid stocks that are herded by other funds.

The investment performance, attributes, and investment behavior of ethical equity mutual funds in the US: an empirical investigation

This paper examines the investment performance of US ethical equity mutual funds relative to the market and their traditional counterparts using a survivorship-bias-free database. We detect selectivity and market timing performance of fund managers using two models. First, we use Treynor and Mazuy’s (Harv Bus Rev 44:131–136, 1966) model to determine these performances from a quadratic regression of fund returns on market returns. Second, we use a comprehensive and integrated model derived by Bhattacharya and Pfleiderer (A note on performance evaluation. Technical Report 714, Stanford, California, Stanford University, Graduate School of Business, 1983) and Lee and Rahman (J Bus 63:261–278, 1990) to simultaneously capture stock selection and market timing skill of fund managers. This model extracts timing skill from the relationship between managers’ forecast and realized market return. In addition, the R2 approach developed by Amihud and Goyenko (Rev Financ Stud 26:667–694, 2013) for evaluating selectivity is also used in this paper. Our empirical results indicate that ethical funds perform no worse than their traditional counterparts, although ethical and traditional funds do not outperform the market. We find some evidence of superior security selection and/or market timing skill among a very small number of ethical and traditional funds. It appears that matching traditional funds have slightly more abnormal (superior as well as inferior) performance than ethical funds in our sample.

The Effect of Fund Managerss Status on Money Flows, Performance, and Risk-Taking Behaviors

This paper examines the effect of money managers’ status on the subsequent money flows, performance, compensation, and risk-taking behavior of mutual funds. We take advantage of shifts in fund managers’ status following the introduction of Morningstar’s Fund Manager of the Year (FMOY) award. While our results show that investors respond positively to award-winning fund managers, we find evidence that award-winning managers generate negative risk-adjusted performance after receiving the award. Our further test shows that such underperformance is attributed to new money flows (i.e. diseconomies of scale). We also find award-winning managers are able to use their increased power to extract higher compensation. Finally, award-winning managers do not take on increased risks as implied by overconfidence. Our results suggest that the ex-post value consequences of superstar status for investors are negative.

Is There a Local Advantage for Mutual Funds That Invest in Eastern Europe?

We investigate the performance and time-varying risk behavior of open-end mutual funds that invest in Central and Eastern European equities. We classify the funds on the basis of the location of their management companies to examine whether fund managers located and operating in the region have an advantage over others that results in excess returns to investors. We cannot detect a local advantage for funds managed from the CEE region as compared to funds managed from other developed European countries, but if we compare the European and non-European managed funds, there are substantial differences both in performance and risk factors.

Agency conflicts in Brazilian stock funds: Categorizing funds in clientele and fee types

This article investigates the behavior of equity mutual funds at calendar semester ends in Brazil between 2004 and 2013. Results suggest that the sampled funds present positive abnormal returns on the last trading day of calendar semesters, followed by negative abnormal returns on the subsequent day. Funds oriented to retail investors and those that charge incentive fees are more likely to display this abnormal return behavior. Exclusive funds present the smallest incidence of abnormal returns. There seems to be evidence of portfolio pumping

Mutual Funds Managerss Investment Allocation Decision: The Case of Egypt

The target of this research is to reach an explanatory model for the behavior of mutual funds’ managers when taking the investment decision among various economic sectors. It tests the hypothesis that a significant relationship exists between the manager’s sector allocation decision and the return, risk and previous allocation to that sector using panel data analysis for a sample of 14 equity funds through the period from January 2007 till December 2011. Results suggest that fund managers tend to increase allocation to sectors with higher returns and decrease them to sectors with higher risks, but disproportionately. The sensitivity to risk is much higher than it is to return, showing that the prospect theory’s premises were true.