Ponzi Funds
Fuente:
arXiv
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| Hauptverfasser: | , , |
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| Format: | Preprint |
| Veröffentlicht: |
2024
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| _version_ | 1866914803977551872 |
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| author | van der Beck, Philippe Bouchaud, Jean-Philippe Villamaina, Dario |
| author_facet | van der Beck, Philippe Bouchaud, Jean-Philippe Villamaina, Dario |
| contents | Many active funds hold concentrated portfolios. Flow-driven trading in these securities causes price pressure, which pushes up the funds' existing positions resulting in realized returns. We decompose fund returns into a price pressure (self-inflated) and a fundamental component and show that when allocating capital across funds, investors are unable to identify whether realized returns are self-inflated or fundamental. Because investors chase self-inflated fund returns at a high frequency, even short-lived impact meaningfully affects fund flows at longer time scales. The combination of price impact and return chasing causes an endogenous feedback loop and a reallocation of wealth to early fund investors, which unravels once the price pressure reverts. We find that flows chasing self-inflated returns predict bubbles in ETFs and their subsequent crashes, and lead to a daily wealth reallocation of 500 Million from ETFs alone. We provide a simple regulatory reporting measure -- fund illiquidity -- which captures a fund's potential for self-inflated returns. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2405_12768 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | Ponzi Funds van der Beck, Philippe Bouchaud, Jean-Philippe Villamaina, Dario General Finance General Economics Economics Pricing of Securities Trading and Market Microstructure Many active funds hold concentrated portfolios. Flow-driven trading in these securities causes price pressure, which pushes up the funds' existing positions resulting in realized returns. We decompose fund returns into a price pressure (self-inflated) and a fundamental component and show that when allocating capital across funds, investors are unable to identify whether realized returns are self-inflated or fundamental. Because investors chase self-inflated fund returns at a high frequency, even short-lived impact meaningfully affects fund flows at longer time scales. The combination of price impact and return chasing causes an endogenous feedback loop and a reallocation of wealth to early fund investors, which unravels once the price pressure reverts. We find that flows chasing self-inflated returns predict bubbles in ETFs and their subsequent crashes, and lead to a daily wealth reallocation of 500 Million from ETFs alone. We provide a simple regulatory reporting measure -- fund illiquidity -- which captures a fund's potential for self-inflated returns. |
| title | Ponzi Funds |
| topic | General Finance General Economics Economics Pricing of Securities Trading and Market Microstructure |
| url | https://arxiv.org/abs/2405.12768 |