Are Mutual Funds Sitting Ducks?
Posted: 15 Mar 2011 Last revised: 8 Oct 2012
Date Written: July 1, 2011
We find that patient traders profit from the predictable, flow-induced trades of mutual funds. In anticipation of a 1%-of-volume change in mutual fund flows into a stock next quarter, the institutions in the same 13F category as hedge funds trade 0.31-0.45% of volume in the current quarter. A third of the trading is associated with the subset of 504 identified hedge funds. The effect is stronger when quarterly mutual fund portfolio disclosure is required and among hedge funds with more patient capital. A one standard deviation higher measure of anticipatory trading by a hedge fund is associated with a 0.9% higher annualized four-factor alpha. A one standard deviation higher measure of anticipation of a mutual fund's trades by institutions is associated with a 0.07-0.15% lower annualized four-factor alpha. The effect is stronger for more constrained mutual funds.
Keywords: Hedge Fund, Mutual Fund Flow
JEL Classification: G11
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