Investor Flows and Fragility in Corporate Bond Funds

Managerial Rents vs. Shareholder Value in Delegated Portfolio Management: The Case of Closed-End Funds

“…Chen, Goldstein, and Jiang (2010) show that this convexity is weaker when the underlying assets are illiquid, which they explain by strategic complementarities among OEF investors due to share redeemability. Consistent with this explanation, a recent study by Goldstein, Jiang, and Ng (2015) find that the flowperformance relation is strongly concave for open-end corporate bond funds. Our findings of a concave growth-performance relation for equity fund managers and a convex relation for bond fund managers suggest, as we expect, that the economic mechanism driving AUM adjustments in the CEF industry is very different from that driving fund flows in the OEF industry.…”

Investor behaviour and reaching for yield: Evidence from the sterling corporate bond market

“…Before the 'taper tantrum' , a climate of persistent fund inflows and rising bond prices encouraged asset managers to buy undervalued bonds to enhance the relative performance of their portfolios (Choi & Kronlund, 2017). However, their procyclical behaviour during the 'taper tantrum' may have reflected a need to sell assets to meet redemptions, particularly in the case of open-ended investment funds (Goldstein et al, 2017;Jiang, Li, & Wang, 2017).…”

“…Furthermore, they also buy significantly less when the VIX is in its top decile. The lower stress capacity of asset managers can be attributed to their relatively fragile funding when compared to insurance companies or banks (see, e.g., Feroli et al, 2014;Goldstein et al, 2017). Hedge funds, on the other hand, often use lock-up periods to reduce their funding liquidity risk, which enables them to capitalise on market mispricings in stress periods (Aiken, Clifford, Ellis, & Huang, 2015).…”

“…Asset managers may face incentives to behave procyclically in stress periods given their exposure to short-term benchmarks and redemption risk (see, e.g., Buffa, Vayanos, & Woolley, 2017;Feroli et al, 2014;Goldstein, Jiang, & Ng, 2017).…”

“…as shown inTable 3.9 The coefficients on the first lag of the change in quarterly yields are positive (but statistically insignificant) and therefore indicate procyclical behaviour of asset managers at this frequency. These results are available upon request.10 The redemption policies in open-end mutual funds might create a first-mover advantage or strategic comple-mentarities (see, e.g.,Chen et al, 2010;Goldstein et al, 2017;Zeng, 2017). The problem is aggravated when the fund holds more illiquid assets(Goldstein et al, 2017).11 Alternatively, the procyclicality at the quarterly level may also be driven by 'window-dressing' , when portfolio managers buy past winners and sell past losers to improve the appearance of a fund's performance.12 Only 0.46% of trades in our sample directly involve a pension fund counterparty.…”