Research

Unmasking Mutual Fund Derivative Use.

Utilizing new SEC data enabling us to compute performance of mutual funds’ derivative positions, we study how funds use derivatives and how derivatives contribute to performance. Despite small portfolio weights, derivatives significantly impact funds’ leverage and contribute largely to returns and cross-sectional differences in returns. In contrast to prior research concluding derivatives are used for hedging, we find most active equity derivative using funds buy index derivatives to amplify market exposure. These amplifying funds underperform nonusers, yet receive more flows. To test whether their strategy is designed to outperform in a crisis, we use the COVID-19 pandemic as an exogenous shock to financial markets. During the crisis, amplifying funds failed to outperform nonusers and suffered a double whammy. In the initial outbreak, they still held substantial long positions and were slow to trade short derivatives, so that they experienced similarly large losses to nonusers. By the time they shifted strategy, the market has already started to rebound, and they lost on their short positions.

Demand for Information and Stock Returns: Evidence from EDGAR.

This paper empirically shows that information acquisition affects stock returns by reducing firm-level information asymmetry. When firms disclose material information known by insiders, information acquisition reduces asymmetric information and lowers stock returns. The effect is stronger for both unexpectedly good and bad news than anticipated news and when investors have a lower cost of information processing. Using the Northeast Blackout of 2003 as a natural experiment, I explore an exogenous shock in information acquisition and show causally that information acquisition reduces information asymmetry in a difference-in-differences setting.

Portfolio Pumping in Mutual Fund Families.

I document portfolio pumping at the fund family level, a strategy that non-star fund managers buy stocks held by star funds in the family to inflate their performance at quarter end. Star funds with high family pumping activities show strong evidence of inflated performance only after 2002, when the Securities and Exchange Commission increased regulation on portfolio pumping at the fund level. Stocks pumped by the strategy show strong reversals at the last trading day of the quarter. Non-star fund managers pumping for star funds receive substantially higher inflows in the future, which cannot be explained by fund characteristics.

Barking Up The Wrong Tree: Return-chasing in 401(k) Plans.

This paper examines investors’ retirement savings allocation using a hand-collected dataset on firm-level employees’ holdings in 401(k) plans. We document the median investor’s return-chasing behavior, the heterogeneous investing styles across wealth levels, and the lack of financial literacy among participants. 83% of the employees hold only 39% of total wealth and chase risk-unadjusted returns when investing in mutual funds and choosing between company stock and funds, leaving substantial money on the table. In contrast, the remaining 17% of employees with a high level of financial sophistication select mutual funds by the CAPM model and exhibit contrarian investing between stock and funds.

Momentum, Echo and Predictability: Evidence from the London Stock Exchange (1820-1930).

We study momentum and its predictability within equities listed at the London Stock Exchange (1820-1930). At the time, this was the largest and most liquid stock market and it was thinly regulated, making for a good laboratory to perform out-of-sample tests. Cross-sectionally, we find that the size and market factors are highly profitable, while long-term reversals are not. Momentum is the most profitable and volatile factor. Its returns resemble an echo: they are high in long-term formation portfolios, and vanish in short-term ones. We uncover momentum in dividends as well. When controlling for dividend momentum, price momentum loses significance and profitability. In the time-series, despite the presence of a few momentum crashes, dynamically hedged portfolios do not improve the performance of static momentum. We conclude that momentum returns are not predictable in our sample, which casts some doubt on the success of dynamic hedging strategies.

Work in Progress

  1. Trading and Momentum (with Ron Kaniel, Gideon Saar, Sheridan Titman)
  2. Smart Money or Dumb Money: Evidence from Inflow/Outflow Sensitivity

Conference Discussion

  1. Fund Size and Managers’ Risk-Shifting: Evidence from Fund Mergers
    By McLemore, Jiang, and Wang, at SFA 2019(Orlando).

References

Ron Kaniel
Jay S. and Jeanne P. Benet Professor of Finance
Simon School of Business
University of Rochester
Email: ron.kaniel@simon.rochester.edu

Alan Moreira
Assistant Professor of Finance
Simon School of Business
University of Rochester
Email: alan.moreira@simon.rochester.edu

Jerold B. Warner
Fred H. Gowen Professor of Finance
Simon School of Business
University of Rochester
Email: jerry.warner@simon.rochester.edu

Giulio Trigilia
Assistant Professor of Finance
Simon School of Business
University of Rochester
Email: giulio.trigilia@simon.rochester.edu

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