Impact of reporting delays on profitability of front-running strategies against mutual funds

• Published in: Managerial finance 2017-01, Vol.43 (9), p.999-1015
• Main Author: Parida, Sitikantha
• Format: Article
• Language: English
• Subjects: Accuracy; Asset allocation; Corporate profits; Disclosure; Financial reporting; Hedge funds; Mutual funds; Portfolio management; Profitability; Profits; Running; Scandals; Stockholders; Studies
• ISSN: 0307-4358; 1758-7743
• DOI: 10.1108/MF-06-2016-0181

Purpose The purpose of this paper is to investigate if there is any impact of reporting delays on profitability of front-running strategies against the mutual funds. Design/methodology/approach The author studies if freshness of mutual fund holding information from public disclosures affects precision of flow-based front-running strategies against the funds and if the allowed 60-day reporting delay is able to protect the funds from these front-running activities against them. Findings Assuming no reporting delay, the author finds that returns from hypothetical front-running strategies are significant, when these are based on the most recent holding information and are not significant, when based on relatively old holding information. Interestingly, these front-running returns appear to be mostly driven by anticipated forced buys by the mutual funds (rather than anticipated forced sales). The return from a front-running strategy long on anticipated forced buys is higher when it is based on relatively illiquid assets. The author also finds that return from a front-running strategy short on anticipated forced sales is significant, when it is based on illiquid assets from relatively old holding information. Practical implications Hence, it appears that the allowed 60-day reporting delay is able to protect most of the funds from front-running activities against them, except for the funds holding illiquid assets from anticipated forced sales motivated front-running activities against them. Originality/value The paper addresses an interesting question, which has not been studied before – if freshness of fund holding information helps the front-running strategies against the funds and if the allowed reporting delay is effective in protecting the funds from these activities.