Front-Running by Mutual Fund Managers: A Mixed Bag

This paper evaluates the welfare implications of front-running by mutual fund managers. It extends the model of Kyle (1985) to a situation in which the insider with fundamentals-information competes against an insider with trade-information and in which noise trading is endogenized. Noise traders are small investors trading through mutual funds to hedge non-tradable or illiquid assets. The insider with trade-information is one of the fund managers. We find that her front-running activity reduces the liquidity costs of her customers, but it also reduces their hedging benefits. As a result, the customers of the front-running manager may be worse off and place smaller orders. The opposite is true, however, for those investors who are not subject to front-running. In aggregate, front-running has either no or positive consequences for welfare.     

Learning about Mutual Fund Managers

We study capital allocations to managers with two mutual funds, and show that investors learn about managers from their performance records. Flows into a fund are predicted by the manager's performance in his other fund, especially when he outperforms and when signals from the other fund are more useful. In equilibrium, capital should be allocated such that there is no cross‐fund predictability. However, we find positive predictability, particularly among underperforming funds. Our results are consistent with incomplete learning: while investors move capital in the right direction, they do not withdraw enough capital when the manager underperforms in his other fund.     

Long-lived information and intraday patterns

This paper studies the effect of clustering of liquidity trades on intraday patterns of volatility and market depth when private information is long-lived. The assumption of long-lived information allows us to distinguish between the patterns of information arrival and information use. Our results are: (i) volatility follows the same pattern as liquidity trading, (ii) there are no systematic patterns in the price impacts of orders, and (iii) the timing of information arrival is unimportant. Result (i) is the same as that obtained by Admati and Pfleiderer (1988) in a model of short-lived private information, but (ii) and (iii) are different.     

On the Timing Ability of Mutual Fund Managers

Existing studies of mutual fund market timing analyze monthly returns and find little evidence of timing ability. We show that daily tests are more powerful and that mutual funds exhibit significant timing ability more often in daily tests than in monthly tests. We construct a set of synthetic fund returns in order to control for spurious results. The daily timing coefficients of the majority of funds are significantly different from their synthetic counterparts. These results suggest that mutual funds may possess more timing ability than previously documented.     

Do Female Mutual Fund Managers Manage Differently?

We examine the performance and investment behavior of female fixed‐income mutual fund managers compared with male fixed‐income mutual fund managers. We find that male‐ and female‐managed funds do not differ significantly in terms of performance, risk, and other fund characteristics. Our results suggest that differences in investment behavior often attributed to gender may be related to investment knowledge and wealth constraints. Despite the similarities between male and female managers, we find evidence that gender influences the decision making of mutual fund investors. We find that the net asset flows into funds managed by females are lower than for males, especially for the manager's initial year managing the fund.     

Termination Risk, Multiple Managers and Mutual Fund Tournaments

This study analyzes the risk-taking behavior of mutual funds in response to their relative performance over the 1992 to 1999 period. Our results show that managers of funds whose performance is closer to that of the top performing funds have greater incentives to increase their portfolios' risk than managers at the top who exhibit a tendency to lock in their positions. The evidence suggests that termination risk imposes a constraint on the risk taking behavior of under-performing fund managers and the winner takes all phenomenon generates a strong incentive for the fund managers to be the top manager. We also analyze the difference in the risk taking behavior of funds managed by multiple managers and single managers.     

Termination Risk, Multiple Managers and Mutual Fund Tournaments

This study analyzes the risk-taking behavior of mutual fundsin response to their relative performance over the 1992 to 1999period. Our results show that managers of funds whose performanceis closer to that of the top performing funds have greater incentivesto increase their portfolios' risk than managers at the topwho exhibit a tendency to lock in their positions. The evidencesuggests that termination risk imposes a constraint on the risktaking behavior of underperforming fund managers and the winnertakes all phenomenon generates a strong incentive for the fundmanagers to be the top manager. We also analyze the differencein the risk taking behavior of funds managed by multiple managersand single managers. JEL Classification codes: G2 L2     

Insider trading and risk aversion

This paper is a continuous time version of Holden and Subrahmanyam (Economics Letters 44 (1994) 181). The paper extends Kyle (Econometrica 53 (1985) 1315) by introducing risk aversion on the side of the monopolist informed trader and allows for the liquidity traders instantaneous demand to depend on cost of trading, as well as on the risk of the stock. The main result of the paper is that, in equilibrium, the price pressure decreases with time regardless of the elasticity of the liquidity demand function.     

Information trading by corporate insiders based on accounting accruals: forecasting economic performance

In this paper, we test whether directors’ (corporate insiders) trading in Australia, based on accounting accruals, provides incremental information in forecasting a firm's economic performance. We determine that directors’ trading on negative accruals in larger firms has greater forecasting content and is associated with 1‐year‐ahead bull market phases. Moreover, arbitrage portfolios set up to mimic insider trading can earn 1‐year‐ahead excess size‐adjusted arbitrage returns of up to 12.2 per cent. Results are consistent with directors hiding their trades in liquid well‐traded firms and in providing incremental information above that supplied by a continuous information regime.     

Herding in the German Mutual Fund Industry

This paper analyses the trading activity of German mutual funds in the 1998–2002 period to investigate whether German mutual fund managers are engaged in herding behaviour. Another objective of the study is to determine the impact of this herd‐like trading on stock prices. Our results provide evidence of herding and positive feedback trading by German mutual fund managers. We show that a significant portion of herding detected in the German market is associated with spurious herding as a consequence of changes in benchmark index composition. Investigating the impact of mutual fund herding on stock prices, we find that herding seems to neither destabilise nor stabilise stock prices.