Common Fund Flows: Flow Hedging and Factor Pricing
62 Pages Posted: 24 Apr 2020 Last revised: 2 Jan 2024
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Common Fund Flows: Flow Hedging and Factor Pricing
Common Fund Flows: Flow Hedging and Factor Pricing
Date Written: December 30, 2022
Abstract
Active equity funds care about fund size, affected by fund flows that obey a strong factor structure with the common component responding to macroeconomic shocks. Funds hedge against common flows by tilting their portfolios toward low-flow-beta stocks, while household/retail and index investors overweight high-flow-beta stocks in equilibrium. Consequently, common flows earn a risk premium, leading to a multi-factor asset-pricing model resembling the ICAPM, even with myopic agents and unsophisticated fund clients. Exploiting quasi-experiments induced by the local-natural-disaster occurrences and the unexpected trade-war announcements, we find that an increased outflow risk faced by funds leads to more aggressive flow-hedging portfolio tilts.
Keywords: Agency conflicts, Mutual fund flows, Intermediary asset pricing, Heterogeneous agents, Uncertainty, Demand shocks
JEL Classification: G11, G12, G23
Suggested Citation: Suggested Citation