Mismarking Fraud in Mutual Funds

Abstract

We study potential fraudulent net asset value (NAV) and return inflation in mutual funds that invest in structured products. We design a filter to identify funds that likely mismark odd lot and two classes of round lot structured products. Applied to structured product-oriented funds launched after January 2010, our 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 and cause material losses to later investor cohorts.

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

JEL Classification: G21, G23, M41