Management of flow risk in mutual funds

Martin Rohleder (), Dominik Schulte () and Marco Wilkens ()
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Martin Rohleder: University of Augsburg
Dominik Schulte: University of Augsburg
Marco Wilkens: University of Augsburg

Review of Quantitative Finance and Accounting, 2017, vol. 48, issue 1, No 2, 56 pages

Abstract: Abstract This paper is the first to relate the investment practices of U.S. equity mutual funds to their management of flow risk, defined as the adverse effect of investor in- and outflows on fund performance. Using a comprehensive merged sample of 2585 actively managed U.S. domestic equity funds from the CRSP mutual fund database and the SEC’s regulatory N-SAR filings, we are the first to detect differences in funds’ responses to flow risk. We find that funds using derivatives, such as options and futures on indices as well as individual stocks, have higher performance than non-using funds. We further show that this outperformance is the result of superior flow risk management using these derivatives and not a result of derivatives based stock-picking or market-timing activities. Overall, our findings document that superior flow management ability is valuable when managing open-end mutual funds and should be considered by investors and researches when evaluating fund performance.

Keywords: Mutual fund performance; Mutual fund flows; Derivatives (search for similar items in EconPapers)
JEL-codes: G11 G20 G23 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (13)

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DOI: 10.1007/s11156-015-0541-1

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