Front-Running of Mutual Fund Fire-Sales

Dyakov, Teodor; Verbeek, Marno

doi:10.2139/ssrn.2170660

Cited by 5 publications

(8 citation statements)

References 16 publications

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“…Interestingly, when I run the same strategy with illiquid assets from holding information with effective dates falling between previous two and five months, I find evidence of significant profit from a strategy short on stocks expected to be in outflow-driven sales over the next month. This is consistent with the findings of Dyakov and Verbeek (2014). It appears that given the lower magnitude of the extreme outflows (compared to extreme inflows), price pressures due to extreme outflows are taking some time to develop.…”

Section: Impact Of Reporting Delayssupporting

confidence: 90%

“…Chen et al (2008) find indirect evidence that hedge funds pursue front-running strategies and profit during periods of mutual fund distress. Dyakov and Verbeek (2014) run a trading strategy, which generates an abnormal return of 0.5 percent per month during the 1990-2010 period.…”

Section: Introductionmentioning

confidence: 99%

“…I also study if front-running strategy based on relatively illiquid holdings yield higher return. Unlike Coval and Stafford (2007) and Parida and Teo (2016), and like Dyakov and Verbeek (2014), my forecast model for next period flows uses information available only up to the current period and hence, it is free of look-ahead bias. My study differs from the study of Dyakov and Verbeek (2014) in two aspects: first, I study a hypothetical situation in which there is no reporting delay (they assume a 60-day delay from the portfolio effective date) [5] as one of my objectives is to investigate if front runners would profit more if there was no reporting delay and second, I distinguish between recent holding information and relatively old holding information (Dyakov and Verbeek, 2014 use all the available information up to eight months old in their front-running strategy).…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Impact of reporting delays on profitability of front-running strategies against mutual funds

Parida

2017

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Purpose The purpose of this paper is to investigate if there is any impact of reporting delays on profitability of front-running strategies against the mutual funds. Design/methodology/approach The author studies if freshness of mutual fund holding information from public disclosures affects precision of flow-based front-running strategies against the funds and if the allowed 60-day reporting delay is able to protect the funds from these front-running activities against them. Findings Assuming no reporting delay, the author finds that returns from hypothetical front-running strategies are significant, when these are based on the most recent holding information and are not significant, when based on relatively old holding information. Interestingly, these front-running returns appear to be mostly driven by anticipated forced buys by the mutual funds (rather than anticipated forced sales). The return from a front-running strategy long on anticipated forced buys is higher when it is based on relatively illiquid assets. The author also finds that return from a front-running strategy short on anticipated forced sales is significant, when it is based on illiquid assets from relatively old holding information. Practical implications Hence, it appears that the allowed 60-day reporting delay is able to protect most of the funds from front-running activities against them, except for the funds holding illiquid assets from anticipated forced sales motivated front-running activities against them. Originality/value The paper addresses an interesting question, which has not been studied before – if freshness of fund holding information helps the front-running strategies against the funds and if the allowed reporting delay is effective in protecting the funds from these activities.

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Section: Impact Of Reporting Delayssupporting

confidence: 90%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Impact of reporting delays on profitability of front-running strategies against mutual funds

Parida

2017

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“…Noninformational liquidity consumption is relatively more pronounced in the case of selling, as selling may simply follow from liquidity needs, the urgency of which leads to immediate liquidity consumption. Institutional investors are known to be impatient consumers of liquidity when their liquidity needs are driven by client outflows that must be met within a fixed time (see, e.g., Dyakov & Verbeek, ). Of course, selling can also be a response to negative information; however, the key aspect here is that selling driven by firm‐specific negative information is less likely to lead to high volume.…”

Section: Conditioning the Short‐horizon Reversal–trading Volume Link mentioning

confidence: 99%

Trading volume and prediction of stock return reversals: Conditioning on investor types' trading

Ülkü

Оніщенко

2019

Journal of Forecasting

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We show that contrasting results on trading volume's predictive role for short‐horizon reversals in stock returns can be reconciled by conditioning on different investor types' trading. Using unique trading data by investor type from Korea, we provide explicit evidence of three distinct mechanisms leading to contrasting outcomes: (i) informed buying—price increases accompanied by high institutional buying volume are less likely to reverse; (ii) liquidity selling—price declines accompanied by high institutional selling volume in institutional investor habitat are more likely to reverse; (iii) attention‐driven speculative buying—price increases accompanied by high individual buying‐volume in individual investor habitat are more likely to reverse. Our approach to predict which mechanism will prevail improves reversal forecasts following return shocks: An augmented contrarian strategy utilizing our ex ante formulation increases short‐horizon reversal strategy profitability by 40–70% in the US and Korean stock markets.

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“…The original fund may, therefore, be forced to trade at unfavorable prices. Cai (2003), Coval and Stafford (2007), Chen et al (2008), Dyakov and Verbeek (2014), Parida (2017) and Parida and Teo (2018) present empirical evidence on front-running activities in the financial markets. Frequent disclosures may also encourage free riding of the funds' proprietary research by copycat funds, and in some situations, it may result in a higher trading cost for the original funds.…”

mentioning

confidence: 93%

Impact of competition on fund disclosures and consumer search costs

Parida

2019

RAF

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Purpose The purpose of this paper is to investigate the impact of competition in financial markets on the frequency of portfolio disclosures by mutual funds and its implications for consumer search costs. Design/methodology/approach The empirical analysis merges the Center for Research in Security Prices (CRSP) survivorship bias-free mutual fund database, the Thompson Financial CDA/ Spectrum holdings database and the CRSP stock price data. The sample covers the time period between 1993 and 2010 and OLS and logistic regressions are used to investigate the impact of competition on fund disclosures. Findings This paper finds that mutual fund disclosures decrease with market competition and this effect is amplified for funds holding illiquid assets. These results provide empirical support for the findings of Carlin et al. (2102). Mutual funds use portfolio disclosures as a marketing tool to attract investments in a tournament-like market, where superior relative performance and greater visibility are rewarded with convex payoffs. With competition, the likelihood of receiving new investments decreases for each fund and funds respond by reducing costly voluntary disclosures. The disclosure costs are higher for funds holding illiquid assets, and hence, the effect is stronger for them. Originality/value This paper has important policy implications for disclosures in a market where relative performance matters. The traditional view is that competition induces voluntary disclosure because entities would like to differentiate themselves from competitors, and hence, competition should increase market transparency. However, this paper sheds light on the negative consequence of competition in a tournament-like mutual fund market.

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Front-Running of Mutual Fund Fire-Sales

Cited by 5 publications

References 16 publications

Impact of reporting delays on profitability of front-running strategies against mutual funds

Impact of reporting delays on profitability of front-running strategies against mutual funds

Trading volume and prediction of stock return reversals: Conditioning on investor types' trading

Impact of competition on fund disclosures and consumer search costs

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