Mutual Fund Trading Research Articles

Trading Without Meeting Friends: Empirical Evidence from the Wuhan Lockdown in 2020

Using a unique proprietary dataset of daily mutual fund trading records and the COVID-19 pandemic-triggered lockdown in Wuhan (China) as a natural experiment, we find that individual mutual fund investors in Wuhan significantly reduced their daily trading frequency, total investment of their portfolios, and risk level of their invested funds during the lockdown period as compared to investors in other cities. The results suggest that the elimination of face-to-face interaction among individual investors during the lockdown reduced their information sharing, which led to more conservatism in their financial trading. We rule out alternative explanations of salience bias due to limited investor attention and temporary changes in personal circumstances such as depression and/or income reduction, during the lockdown period. Finally, consistent with the theory of naïve investor trading, we also find that investors received higher trading returns during the lockdown as they reduced trading aggressively in the absence of face-to-face interactions.

Flow-Induced Trading: Evidence from the Daily Trading of Municipal Bond Mutual Funds

Flow-Induced Trading: Evidence from the Daily Trading of Municipal Bond Mutual Funds

Imputing Mutual Fund Trades

Imputing Mutual Fund Trades

TAXI! Do Mutual Funds Pursue and Exploit Information on Local Companies?

AbstractWe use New York City (NYC) taxi data to identify trips between mutual fund offices and local firm headquarters. NYC funds overweight the stocks of local firms they visit via taxi, and firm visits are associated with superior investment performance. Firm visits are elevated prior to earnings announcements, and mutual fund trades that are associated with firm taxi visits predict earnings surprises. The results are generally stronger when fund and firm executives share educational connections. Additional tests support the conclusion that funds’ local bias and investment performance are driven by portfolio managers’ efforts and ability to actively gather material information.

Bank affiliation and mutual funds’ trading strategy distinctiveness

This study investigates the effect of commercial bank affiliation on mutual fund trading strategy distinctiveness. We find that bank affiliation has a significantly positive relationship with mutual funds’ unique investment strategies, and this phenomenon exhibits better performance, supporting the benefits of bank affiliation. This association is most pronounced around macroeconomic releases, during high economic policy uncertainty periods, and among funds located within a close distance from their parent bank headquarters. Further analysis indicates that the more talented affiliated fund managers tend to pursue the distinctive strategy. Therefore, our evidence reveals that the underlying mechanisms are that affiliated funds own information advantages or hire more skilled fund managers due to the unique position of commercial banks in the economy. Finally, our results suggest that affiliated funds with a higher Strategy Distinctiveness Index attract stronger net inflows and are less exposed to risks. Our findings remain unchanged after several robustness tests.

The Information in Industry-Neutral Self-Financed Trades

AbstractWe identify Industry-Neutral Self-Financed Informed Trading (INSFIT) as stock trades financed by offsetting, equivalent dollar-denominated stock trades in the same industry. Approximately 37% of short-term mutual fund trading profits can be attributed to these trade pairs. Consistent with informed trading, INSFIT precedes unusually high media coverage for the underlying stocks. The trades underlying INSFIT are also larger as the release of stock-level news becomes more imminent. Both relative valuation and the hedging of industry exposure motivate INSFIT’s industry neutrality. While INSFIT positively impacts fund performance, active fund managers who execute INSFIT more aggressively obtain smaller trading profits per execution.

Do fund managers time momentum? Evidence from mutual fund and hedge fund returns

AbstractBy examining fund returns we find strong evidence that both hedge funds and mutual funds trade on momentum. Moreover, the average hedge fund has modest momentum timing skill, trading more aggressively when momentum profits are higher, while the average mutual fund does not. Momentum trading alone does not translate into superior performance. However, funds with momentum timing ability significantly outperform and the risk‐adjusted‐return‐difference between the top and the bottom timers is around 1.7% (1.3%) per year for hedge (mutual) funds. We provide further evidence that dynamic momentum strategies enhance fund performance, and momentum timing skills vary considerably with fund investment styles.

Optimal information production of mutual funds: Evidence from China

This study demonstrates that Chinese stock mutual funds exhibit persistent preference for growth stocks over value stocks. Despite the positive premium of value stocks over growth stocks, funds in aggregate manage to beat the market. Moreover, growth-oriented funds do not underperform their value-oriented peers. To solve these puzzles, we provide evidence for funds’ superior skill in picking growth stocks over value stocks, and conclude that such skill helps explain their growth tilt. Furthermore, we show that mutual funds trade against the retail investors, more so in growth stocks than in value stocks. Coupled with our finding that retail investors make more mistakes trading growth stocks than trading value stocks, we conclude that mutual funds optimize their information production to focus more on growth stocks so as to maximize returns.

Do Mutual Funds Trade on Earnings News? The Information Content of Large Active Trades

Using monthly holdings data, we show that in contrast to findings in existing literature, mutual fund trades in aggregate do not have predictive power for future earnings information. We identify active trades by mutual funds, that is, trades not passively driven by fund flows, and show that only large active trades by mutual funds contain information on future earnings. Moreover, we show evidence that large active trades by mutual funds help incorporate future earnings information into stock prices and significantly improve stock price efficiency. Finally, we show that large active trades by mutual funds prior to earnings announcements deliver superior abnormal returns. Mutual fund managers that actively trade on future earnings information are skilled; the top quintile skilled funds on average outperform those in the bottom quintile by 127 bps in four-factor alpha over subsequent four quarters.

The Wall Street stampede: Exit as governance with interacting blockholders

The growth of the asset management industry has made it commonplace for firms to have multiple institutional blockholders. In such firms, the strength of governance via exit depends on how blockholders react to each other’s exit. We present a model to show that open-ended institutional investors such as mutual funds react strongly to an informed blockholder’s exit, leading to correlated exits that enhance corporate governance. Our analysis points to a new role for mutual funds in corporate governance. We examine the trades of mutual funds around exits by activist hedge funds to present empirical evidence consistent with our model.

Index Returns and Institutional Trading

It is acknowledged that only 2% of the Indian public invest in stock markets. This compares with 55% in the USA and about 25% in the EU. The Indian public is therefore a miniscule proportion of investors and the power of the Indian public to move markets is negligible.This means that most trading activity in Indian stock markets are by institutional investors consisting of Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs). It seems reasonable to hypothesize that their trading activities influence market returns. This paper aims to verify whether this hypothesis can be sustained by analyzing historical data and calculating statistics such as correlations, regression coefficients and coefficients of determination between FII and DII trading activity and Nifty 500 returns. The key aspects that have been evaluated are buying and selling by these institutional investors. Buy/sell ratios of these institutional investors have also been evaluated since buy/sell ratios are a proxy indicator that indicates the strength of bullishness by these institutional investors.A similar analysis also been done on Mutual Fund trading activity although mutual fund trading activity is normally subsumed under DII trading activity. Since it can be assumed that Mutual Fund trading arises mostly from the ebb and flow of funds from the investing public, they are an important indicator of general public sentiment.Some significant unexpected results have been obtained as the result of the analysis. For example, it has been found that Domestic Institutional Investor buying has negative impact on Nifty 500 return. This is unexpected since it would normally be assumed that an increase in buying by an important constituency such as Domestic Institutional Investor would likely increase Nifty 500 returns on average.

Information Leakage Around SEC Comment Letters

We investigate whether sophisticated investors obtain information about Securities and Exchange Commission (SEC) comment letters before the public release date. Specifically, we examine mutual fund trading behavior around dates firms receive a comment letter. We find significant abnormal net selling by mutual funds immediately after a firm receives a comment letter. Additional tests find that abnormal net selling is greater when firms receive a second-round letter, where information leakage is more likely (e.g., firms with high board member connectedness and higher dedicated institutional ownership) and when comment letters address more critical issues (e.g., the need to restate prior results or related party transactions). We also find that funds with high abnormal net selling in the private phase avoid significant future share price declines. In sum, we find consistent evidence that mutual funds appear to trade on information obtained during the private phase of the SEC comment letter process. This paper was accepted by Brian Bushee, accounting. Supplemental Material: Data are available at https://doi.org/10.1287/mnsc.2021.4259 .

Mutual Fund Trading and ESG Stock Resilience During the Covid-19 Stock Market Crash

Mutual Fund Trading and ESG Stock Resilience During the Covid-19 Stock Market Crash

How volatility affects the behaviour of institutional investors in emerging markets

The investments made by domestic institutional investors (DII) have turned out to be a dynamic force for the development of Indian stock markets. This situation has motivated me to study the nexus between DII's capital flows and stock market volatility. Most studies have taken mutual funds as the proxy for DII. This paper has considered the disintegrated data of DII, which includes mutual funds and insurance companies, banks, and development financial institutions (DFI). The study discloses that out of four DII, insurance companies increase the market volatility. On the other hand, trading of banks, mutual funds, and DFI are helping to decrease the volatility in stock markets. Thus, they contribute to correct the overreaction in stock markets resulting from noise trading. Moreover, all the DII's act as informed traders because they take advantage of the volatile markets for investments.

Informed trading in government bond markets

Using comprehensive administrative data from the UK, we examine trading by different investor types in government bond markets. Our sample covers virtually all secondary market trading in gilts and contains detailed information on each transaction, including the identities of both counterparties. We find that hedge funds’ daily trading positively forecasts gilt returns in the following one to five days, which is then fully reversed in the following month. A part of this short-term return predictability is due to hedge funds’ ability to predict other investors’ future demand. Mutual fund trading also positively predicts gilt returns, but over a longer horizon of one to two months. This return pattern does not revert in the following year and is partly due to mutual funds’ ability to forecast changes in short-term interest rates.

Inside brokers

We identify the broker each corporate insider trades through, and find that analysts and mutual fund managers affiliated with such “inside brokers” have a substantial information advantage on the insider’s firm. Affiliated analysts issue more accurate earnings forecasts, and affiliated mutual funds trade the insider’s stock more profitably than their peers, following insider trades through their brokerage. Notably, this advantage persists well after these insider trades are publicly disclosed. Our results challenge the prevalent perception that information asymmetry arising from insider trading is acute only before trade disclosure, and suggest that brokers facilitating these trades are in a position to exploit this asymmetry.

Payment methods and the disposition effect: Evidence from Indonesian mutual fund trading

This paper investigates the link between payment methods used by investors in mutual funds and the tendency with which investors realize gains earlier than losses — the disposition effect. We utilize a proprietary dataset detailing investor trading accounts in Indonesian mutual funds, whom are permitted to buy and sell securities in exchange for cash or other assets. These two payment methods are economically equivalent in value and cost; however, differ in payment saliency. We find that more salient payment methods are associated with a higher disposition effect and vice versa, less salient payments are associated with a smaller tendency to realize gains more readily than losses.

Exchange-traded certificates, education and the disposition effect

This study establishes a link between the disposition effect present in the transactions of exchange-trade certificates (ETC), investor education and different dimensions of trading experience. Using transaction-level data of 35,508 individuals from a major Portuguese financial institution spanning from 1998 to 2017, we show that ETC investors exhibit, on average, strong disposition effect. Individuals are 151% more likely to sell an ETC when that financial instrument trades at a paper gain than when it trades at a paper loss. The level of education of individuals attenuates the disposition effect, with individuals holding a university degree presenting weaker disposition effect. The number of transactions of securities (and of derivatives in particular) and mutual fund trading experience also lessen the disposition effect. Nevertheless, neither education nor experience fully offset the disposition effect. Finally, the impact of experience as a moderator of the disposition effect is stronger amid most educated individuals.

Forced Sales and Dealer Choice in OTC Markets

Using novel trade-level data, we study how municipal bond mutual funds trade in response to daily flows. 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. Funds are especially likely to turn to more central dealers when trading lower rated bonds, when funds have low cash buffers, and when trading after periods of aggregate outflows. More central dealers charge higher markups when funds demand fast execution.

Should Mutual Fund Investors Time Volatility?

Increasing (decreasing) investment in an actively managed mutual fund when fund volatility has recently been low (high) leads to a significant improvement in investment performance. Specifically, volatility-scaled fund returns exhibit significantly higher alphas and Sharpe ratios than the original (unscaled) fund returns. Scaling by past downside volatility leads to even greater performance improvement than scaling by total volatility. The superior performance of volatility-managed mutual fund trading strategies is attributable to both volatility timing and return timing. Fund flows are negatively related to past fund volatility, suggesting that fund investors are aware of the benefit of volatility management.