Management of Flow Risk in Mutual Funds

46 Pages Posted: 3 Apr 2014 Last revised: 18 Mar 2018

See all articles by Martin Rohleder

Martin Rohleder

University of Augsburg

Dominik Schulte

University of Augsburg

Marco Wilkens

University of Augsburg

Date Written: October 12, 2015

Abstract

This paper is the first to relate the investment practices of U.S. equity mutual funds to their management of flow risk, defined as the adverse effect of investor in- and outflows on fund performance. Using a comprehensive merged sample of 2,585 actively managed U.S. domestic equity funds from the CRSP mutual fund database and the SEC’s regulatory N-SAR filings, we are the first to detect differences in funds’ responses to flow risk. We find that funds using derivatives, such as options and futures on indices as well as individual stocks, have higher performance than non-using funds. We further show that this outperformance is the result of superior flow risk management using these derivatives and not a result of derivatives based stock-picking or market-timing activities. Overall, our findings document that superior flow management ability is valuable when managing open-end mutual funds and should be considered by investors and researches when evaluating fund performance.

Keywords: Mutual fund performance, mutual fund flows, derivatives

JEL Classification: G11, G20, G23

Suggested Citation

Rohleder, Martin and Schulte, Dominik and Wilkens, Marco, Management of Flow Risk in Mutual Funds (October 12, 2015). Review of Quantitative Finance and Accounting 2017, 45(1), 31-56.. Available at SSRN: https://ssrn.com/abstract=2419143 or http://dx.doi.org/10.2139/ssrn.2419143

Martin Rohleder

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4120 (Phone)

Dominik Schulte (Contact Author)

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

Marco Wilkens

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4124 (Phone)
+49 821 598 4223 (Fax)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/wilkens_marco/

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