Mismarking in Mutual Funds

89 Pages Posted: 13 Jun 2019 Last revised: 10 Jan 2022

See all articles by Vladimir A. Atanasov

Vladimir A. Atanasov

William and Mary - Raymond A. Mason School of Business

John J. Merrick, Jr.

Raymond A. Mason School of Business - William & Mary

Philipp Schuster

University of Stuttgart

Date Written: July 20, 2021

Abstract

We study mismarking of newly purchased odd lot and two classes of round lot structured product
positions in mutual funds. Such mismarking artificially inflates net asset values and overstates cumulative returns. Applied to funds launched after January 2010, a simulation-tested mismarking fund filter identifies 12 Highly Questionable funds managing $75 billion. The performance of these funds matches closely the predicted pattern of mismarking: extremely high alpha and skewness, particularly immediately after launch. We show that structured product mismarking can seriously inflate return-since-inception metrics. We also provide evidence consistent with return smoothing for one quarter of the sample structured product funds. The inflated performance metrics benefit fund managers through significantly higher Sharpe Ratios, Morningstar ratings, and asset growth, but cause material losses to later investor cohorts.

Keywords: mutual fund performance, structured products, odd lot, mismarking

JEL Classification: G21, G23, M41

Suggested Citation

Atanasov, Vladimir A. and Merrick, Jr., John J. and Schuster, Philipp, Mismarking in Mutual Funds (July 20, 2021). Available at SSRN: https://ssrn.com/abstract=3395430 or http://dx.doi.org/10.2139/ssrn.3395430

Vladimir A. Atanasov

William and Mary - Raymond A. Mason School of Business ( email )

P.O. Box 8795
Williamsburg, VA 23187-8795
United States

John J. Merrick, Jr. (Contact Author)

Raymond A. Mason School of Business - William & Mary ( email )

Williamsburg, VA 23187
United States
757-221-2721 (Phone)

HOME PAGE: http://https://mason.wm.edu/faculty/directory/full-time-faculty/merrick_j.php

Philipp Schuster

University of Stuttgart ( email )

Keplerstraße 17
D-70174 Stuttgart
Germany
+49 711 685-86001 (Phone)

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