Mismarking Fraud in Mutual Funds

88 Pages Posted: 13 Jun 2019 Last revised: 23 Mar 2020

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

Karlsruhe Institute of Technology (KIT), Institute of Finance, Banking, and Insurance

Date Written: March 20, 2020

Abstract

We study potential fraudulent mismarking of newly purchased odd lot and two classes of round lot positions in structured products. Such mismarking artificially inflates net asset values and overstates cumulative returns. Applied to mutual 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 in at one quarter of the sample structured product funds. The inflated performance metrics benefit fund managers through significantly higher 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 Fraud in Mutual Funds (March 20, 2020). 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

Karlsruhe Institute of Technology (KIT), Institute of Finance, Banking, and Insurance ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany
+49 721 608 48184 (Phone)
+49 721 608 48190 (Fax)

HOME PAGE: http://derivate.fbv.kit.edu

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