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Common Fund Flows: Flow Hedging and Factor Pricing

Author

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  • Winston Wei Dou
  • Leonid Kogan
  • Wei Wu

Abstract

Active equity funds care about fund size, affected by fund flows that obey a strong factor structure with the common component responding to macroeconomic shocks. Funds hedge against common flows by tilting their portfolios toward low-flow-beta stocks, while household/retail and index investors overweight high-flow-beta stocks in equilibrium. Consequently, common flows earn a risk premium, leading to a multi-factor asset-pricing model resembling the ICAPM, even with myopic agents and unsophisticated fund clients. Exploiting quasi-experiments induced by the local-natural-disaster occurrences and the unexpected trade-war announcements, we find that an increased outflow risk faced by funds leads to more aggressive flow-hedging portfolio tilts.

Suggested Citation

  • Winston Wei Dou & Leonid Kogan & Wei Wu, 2022. "Common Fund Flows: Flow Hedging and Factor Pricing," NBER Working Papers 30234, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30234
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    Cited by:

    1. Aragon, George O. & Kim, Min S., 2023. "Fire sale risk and expected stock returns," Journal of Financial Economics, Elsevier, vol. 149(3), pages 578-609.
    2. Dekker, Lennart, 2024. "Essays on asset liquidity and investment funds," Other publications TiSEM 5fc9bf77-84e7-4a36-9e3a-1, Tilburg University, School of Economics and Management.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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