Correlated Flows, Portfolio Similarity and Mutual Fund Liquidity Management

61 Pages Posted: 7 Nov 2017

See all articles by Vikram K. Nanda

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Kelsey D. Wei

University of Texas at Dallas

Date Written: October 31, 2017

Abstract

We contend that the confluence of portfolio similarity and correlated liquidity shocks within mutual fund styles can exacerbate fund exposure to liquidity risk. We find that mutual funds mitigate such liquidity risk exposure by systematically reducing portfolio overlap with peer funds when their flows become more correlated (Overlap Management). Overlap Management is highly persistent and is more pronounced among funds with liquidity concerns. Funds engaging in overlap management tend to avoid stocks that are more vulnerable to flow-driven trading when facing correlated flows. As a result, this type of liquidity management independently contributes to higher fund performance after controlling for the direct relation between portfolio overlap and fund performance. Further analyses suggest that the performance consequences of Overlap Management appear related to the weakened feedback effect of past outflows on fund performance. The benefit of Overlap Management is distinct from that of strategy uniqueness as studied in prior literature.

Suggested Citation

Nanda, Vikram K. and Wei, Kelsey D., Correlated Flows, Portfolio Similarity and Mutual Fund Liquidity Management (October 31, 2017). Fifth Annual Conference on Financial Market Regulation. Available at SSRN: https://ssrn.com/abstract=3065592

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Kelsey D. Wei (Contact Author)

University of Texas at Dallas ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
9728835978 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
35
Abstract Views
259
PlumX Metrics