DP11476 Investor-Stock Decoupling in Mutual Funds

Author(s):	Miguel Ferreira, Massimo Massa, Pedro Pinto Matos
Publication Date:	August 2016
Keyword(s):	Fund flows, Limits to Arbitrage, Mutual funds, Performance, Risk Taking
JEL(s):	G20, G23
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=11476

We investigate whether mutual funds whose investors and stocks are decoupled (i.e., investor location does not coincide with that of the stock holdings) benefit from a natural hedge as they have fewer outflows during market downturns and fewer inflows during upturns. Using a sample of equity mutual funds from 26 countries, we find that funds with higher investor-stock decoupling exhibit higher performance and this is more pronounced during the 2007-2008 financial crisis. We also find that decoupling allows fund managers to take less risk, be more active, and tilt their portfolios toward smaller and less liquid stocks.