Ponzi Funds

48 Pages Posted: 20 May 2024 Last revised: 21 May 2024

See all articles by Philippe van der Beck

Philippe van der Beck

Harvard Business School

Jean-Philippe Bouchaud

Capital Fund Management

Dario Villamaina

Capital Fund Management

Date Written: May 20, 2024

Abstract

Many active funds hold concentrated portfolios. Flow-driven trading in these securities causes price pressure, which pushes up the funds' existing positions resulting in realized returns. We decompose fund returns into a price pressure (self-inflated) and a fundamental component and show that when allocating capital across funds, investors are unable to identify whether realized returns are self-inflated or fundamental. Because investors chase self-inflated fund returns at a high frequency, even short-lived impact meaningfully affects fund flows at longer time scales. The combination of price impact and return chasing causes an endogenous feedback loop and a reallocation of wealth to early fund investors, which unravels once the price pressure reverts. We find that flows chasing self-inflated returns predict bubbles in ETFs and their subsequent crashes, and lead to a daily wealth reallocation of 500 Million from ETFs alone. We provide a simple regulatory reporting measure -- fund illiquidity -- which captures a fund's potential for self-inflated returns.

Keywords: Flows, Impact, Exchange traded funds, Bubbles, Demand-based asset pricing, Price pressure

JEL Classification: G11, G12, G14, G23

Suggested Citation

van der Beck, Philippe and Bouchaud, Jean-Philippe and Villamaina, Dario, Ponzi Funds (May 20, 2024). Available at SSRN: https://ssrn.com/abstract=4834390 or http://dx.doi.org/10.2139/ssrn.4834390

Philippe Van der Beck (Contact Author)

Harvard Business School ( email )

Jean-Philippe Bouchaud

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France
+33 1 49 49 59 20 (Phone)

Dario Villamaina

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

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