Liquidity Picking and Fund Performance
71 Pages Posted: 20 Jul 2020 Last revised: 31 Oct 2022
Date Written: October 25, 2022
Abstract
Using global mutual fund and ADR data, we test if funds strategically trade cross-listed firms’
equity in the most liquid location – the United States or the stock’s domestic market. Funds
conducting such security liquidity picking (SLP) outperform. This result is robust to various
return and holdings-based performance tests, is driven by superior stock-picking ability even
of non-cross-listed stocks rather than transaction costs minimization, and is stronger for high
active share funds. Consistent liquidity picking mitigates funds’ capacity constraints creating
$11.6 million in value-added per year. Our tests directly support the theories of informed
trading in a multi-market setting.
Keywords: Fund holdings, Liquidity management, Performance persistence, Stock selection
JEL Classification: G15, G23
Suggested Citation: Suggested Citation