Mismarking in Mutual Funds

Vladimir Atanasov (), John J. Merrick () and Philipp Schuster ()
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Vladimir Atanasov: Raymond A. Mason School of Business, William & Mary, Williamsburg, Virginia 23185
John J. Merrick: Raymond A. Mason School of Business, William & Mary, Williamsburg, Virginia 23185
Philipp Schuster: School of Management, University of Stuttgart, 70174 Stuttgart, Germany

Management Science, 2023, vol. 69, issue 2, 1275-1300

Abstract: We study mismarking of newly purchased odd lot and two classes of round lot structured product positions in mutual funds. Such mismarking artificially inflates net asset values and overstates cumulative returns. Applied to funds launched after January 2010, a simulation-tested mismarking fund filter identifies 12 Highly Questionable funds managing $75 billion. The performance of these funds matches closely the predicted pattern of mismarking: extremely high alpha and skewness, particularly immediately after launch. We show that structured product mismarking can seriously inflate return-since-inception metrics. We also provide evidence consistent with return smoothing for one quarter of the sample structured product funds. The inflated performance metrics benefit fund managers through significantly higher Sharpe ratios, Morningstar ratings, and asset growth but cause material losses to later investor cohorts.

Keywords: mutual fund performance; structured products; odd lot; mismarking (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:2:p:1275-1300

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