Common Fund Flows: Flow Hedging and Factor Pricing
62 Pages Posted: 24 Apr 2020 Last revised: 14 Sep 2020
Date Written: September 3, 2020
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: Suggested Citation