Common Fund Flows: Flow Hedging and Factor Pricing

62 Pages Posted: 24 Apr 2020 Last revised: 14 Sep 2020

See all articles by Winston Dou

Winston Dou

The Wharton School, University of Pennsylvania

Leonid Kogan

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Wei Wu

Texas A&M University

Date Written: September 3, 2020

Abstract

Fund managers care about fund size, which fluctuates due to shocks in fund returns and flows. Consequently, they have flow-hedging motives to tilt portfolios toward low-flow-beta stocks, boosting these stocks' valuations. Fund flows endogenously respond to macroeconomic conditions, and thus a risk premium analogous to the ICAPM's intertemporal hedging term emerges even in a myopic environment. Net alphas also fluctuate endogenously helping stabilize fund assets. Empirically, fund flows obey a strong factor structure with the common component priced, and fund portfolios are further tilted toward low-flow-beta stocks following increases in flow-hedging motives, instrumented using natural disasters and unexpected trade-war announcements.

Keywords: Mutual fund flows, Factor models, Heterogeneous agents, Asset allocations, Supply of delegation, Natural disasters, Uncertainty.

JEL Classification: G11, G12, G23

Suggested Citation

Dou, Winston and Kogan, Leonid and Wu, Wei, Common Fund Flows: Flow Hedging and Factor Pricing (September 3, 2020). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , Available at SSRN: https://ssrn.com/abstract=3543675 or http://dx.doi.org/10.2139/ssrn.3543675

Winston Dou (Contact Author)

The Wharton School, University of Pennsylvania ( email )

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Leonid Kogan

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Cambridge, MA 02142
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617-253-2289 (Phone)
617-258-6855 (Fax)

HOME PAGE: http://web.mit.edu/lkogan2/www/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Wei Wu

Texas A&M University ( email )

360M Wehner
College Station, TX 77843-4218
United States
979-862-8092 (Phone)

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