Unmasking Mutual Fund Derivative Use During the COVID-19 Crisis.

Utilizing newly available data from the SEC on derivative performance and detailed derivative holdings, this paper studies how derivatives impact mutual fund performance, with an emphasis on the COVID-19 pandemic period. In contrast to previous research concluding derivatives are used for hedging, we find that most active equity funds use derivatives to amplify market exposure. Despite the seemingly small weight, derivatives have a significant impact on funds’ leverage and contribute largely to fund returns. In response to the initial outbreak of COVID-19, funds trade more heavily on short derivative positions. This behavior is more prevalent among managers residing in states with early state-level Stay-at-home orders, where the risk of recession is likely more salient. Funds that used derivatives for hedging purposes before the crisis significantly outperform nonusers by over 9% during the initial outbreak, as their distribution of derivative returns shifts to the right. By the end of June, they still outperform by 1.6%. On the contrary, funds that used derivatives to amplify market exposure underperform, and their distribution of derivative returns shifts to the left. While they do shift strategies, they are slow to open short positions and remain mostly amplifying funds. Consequently, by the time they shift, the market has already started to recover, so that they lose on their short positions. The shifts in derivative return distributions during the COVID-19 crisis are mostly driven by swap contracts, which have been ignored by prior studies.

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 that was known by insiders, demand for information reduces the asymmetric information faced by uninformed investors and lowers the stock returns persistently. The effect is much stronger for both unexpectedly good and bad news than for anticipated news, consistent with the information asymmetry reduction channel. Moreover, demand for information has stronger effects when investors are geographically close to firm headquarters or have prior experience in collecting firm-specific information, suggesting that the cost of information processing affects information asymmetry. Furthermore, I explore an exogenous variation in information acquisition using the Northeast Blackout of 2003 as a natural experiment, and identify its causal effect on 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 Mutual Funds.

This paper examines how investors allocate their savings at the micro-level. Using a hand-collected dataset consisting of firm-level investment decisions of employees in 401(k) plans, we characterize the return-chasing behavior of the median investor and demonstrate a lack of financial literacy among investors in the retirement market. Specifically, we show that only 17% of the population with a high level of financial sophistication hold 61% of the wealth and invest based on the CAPM alpha, whereas 83% of the population chase unadjusted returns and leave substantial money on the table.

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.