Mutual Fund Portfolio Choice in the Presence of Dynamic Flows

41 Pages Posted: 29 Mar 2010

See all articles by Julien Hugonnier

Julien Hugonnier

Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Ron Kaniel

University of Rochester - Simon Business School; CEPR

Multiple version iconThere are 2 versions of this paper

Date Written: 2008-06

Abstract

We analyze the implications of dynamic flows on a mutual fund's portfolio decisions. In our model, myopic investors dynamically allocate capital between a riskless asset and an actively managed fund which charges fraction-of-fund fees. The presence of dynamic flows induces “flow hedging” portfolio distortions on the part of the fund, even though investors are myopic. Our model predicts a positive relationship between a fund's proportional fee rate and its volatility. This is a consequence of higher-fee funds holding more extreme equity positions. Although both the fund portfolio and investors' trading strategies depend on the proportional fee rate, the equilibrium value functions do not. Finally, we show that our results hold even if investors are allowed to directly trade some of the risky securities.

Suggested Citation

Hugonnier, Julien and Kaniel, Ron, Mutual Fund Portfolio Choice in the Presence of Dynamic Flows (2008-06). Mathematical Finance, Vol. 20, Issue 2, pp. 187-227, April 2010. Available at SSRN: https://ssrn.com/abstract=1578535 or http://dx.doi.org/10.1111/j.1467-9965.2010.00395.x

Julien Hugonnier (Contact Author)

Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL Dorigny
Extranef
Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/hugonnier

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Ron Kaniel

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://rkaniel.simon.rochester.edu

CEPR ( email )

London
United Kingdom

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