Common Fund Flows: Flow Hedging and Factor Pricing

61 Pages Posted: 24 Apr 2020 Last revised: 16 Dec 2022

See all articles by Winston Wei Dou

Winston Wei Dou

The Wharton School, University of Pennsylvania; National Bureau of Economic Research (NBER)

Leonid Kogan

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

Wei Wu

Texas A&M University

Multiple version iconThere are 2 versions of this paper

Date Written: May 17, 2022

Abstract

Active equity funds care about fund size, affected by fund flows that obey a strong factor structure with the common component responding to macroeconomic shocks. Funds hedge against common flows by tilting their portfolios toward low-flow-beta stocks, while household/retail and index investors overweight high-flow-beta stocks in equilibrium. Consequently, common flows earn a risk premium, leading to a multi-factor asset-pricing model resembling the ICAPM, even with myopic agents and unsophisticated fund clients. Exploiting quasi-experiments induced by the local-natural-disaster occurrences and the unexpected trade-war announcements, we find that an increased outflow risk faced by funds leads to more aggressive flow-hedging portfolio tilts.

Keywords: Agency conflicts, Demand shocks, Mutual fund flows, Intermediary asset pricing, Heterogeneous agents, Uncertainty

JEL Classification: G11, G12, G23

Suggested Citation

Dou, Winston Wei and Kogan, Leonid and Wu, Wei, Common Fund Flows: Flow Hedging and Factor Pricing (May 17, 2022). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3543675 or http://dx.doi.org/10.2139/ssrn.3543675

Winston Wei Dou (Contact Author)

The Wharton School, University of Pennsylvania ( email )

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HOME PAGE: http://finance-faculty.wharton.upenn.edu/wdou/

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Leonid Kogan

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

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

National Bureau of Economic Research (NBER)

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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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