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

Abstract

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.

Financial Crisis and Corporate Social Responsible Mutual Fund Flows

“…Our paper shows that in addition to fund performance and fund flows, fund investments in CSR stocks can predict future fund flows. Third, our findings also have implications for strategic trading activities in the market such as front-running (Coval and Stafford 2007;Parida and Teo 2016;Parida 2017;Dyakov and Verbeek 2014). A front-running strategy refers to a trading strategy in which smart funds trade in securities in anticipation of trades by other funds.…”

Impact of competition on fund disclosures and consumer search costs

“…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.…”