Do Hedge Funds Manipulate Stock Prices?

Abstract

We provide evidence suggesting that some hedge funds manipulate stock prices on critical reporting dates. Stocks in the top quartile of hedge fund holdings exhibit abnormal returns of 0.30% on the last day of the quarter and a reversal of 0.25% on the following day. A significant part of the return is earned during the last minutes of trading. Analysis of intraday volume and order imbalance provides further evidence consistent with manipulation. These patterns are stronger for funds that have higher incentives to improve their ranking relative to their peers.

Wrong Kind of Transparency? Mutual Funds’ Higher Reporting Frequency, Window Dressing, and Performance

“…We also expect that WD and price-pumping are likely substitutes because either one can be used by fund managers to make their portfolio holdings look better (and prior studies debate which one is the main vehicle). The mechanisms and costs involved are quite different: For price-pumping, managers make buy orders to push the prices of the stocks in their portfolio higher immediately before EOQ, so that they can create the illusion of having picked winners (Carhart et al [2002], Ben-David et al [2013], Hu et al [2014]). For WD, on the other hand, managers buy prior winners and sell losers.…”

Did the STOCK Act Impact the Performance, Risk, and Flow of Hedge Funds?

“…Many studies have focused primarily on the vital relationship between hedge funds' characteristics and their respective benchmarks. These include relationships of hedge fund returns after the release of an IPO (Sun, Teo 2019), market imbalance brought on by hedge funds (Ben, Franzoni, Landier, Moussawi 2013) and the ability to time market liquidity using hedge funds (Cao, Chen, Liang, Lo 2013).…”

“…Studies show that fund managers typically raise the performance fee slightly to make the fund look more attractive (e.g. Ben-David, Franzoni, Moussawi 2013). This practice is known as performance manipulation.…”

Are institutional investors colluding with manipulators?

“…To compete with other financial intermediaries in the raising of capital from investors, financial institutions have had to increase their constraints, inadvertently restricting the arbitrage activities of institutions. Ben‐David et al (2013) find that some hedge funds pump their stock prices on critical reporting dates, and short sellers often increase selling pressure in the last minutes of the year to boost their profits. Additional research provides evidence of performance manipulation.…”

“…Prior research has also revealed that certain characteristics, such as liquidity, market prices, efficiency, and volatility, make stocks vulnerable to price manipulation (Aggarwal & Wu, 2006; Khwaja & Mian, 2005). Many papers discuss the motivations behind stock price manipulation, such as “window dressing” before reporting dates of fund managers (Ben et al, 2013; Ouyang & Cao, 2020). The latest research on this topic focuses on the development of tools and techniques to detect stock price manipulation, such as artificial intelligence or wash trade techniques (Imisiker & Tas, 2018; Liu et al, 2021).…”