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

Abstract

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.

Citation

Parida, S. (2017), "Impact of reporting delays on profitability of front-running strategies against mutual funds", Managerial Finance, Vol. 43 No. 9, pp. 999-1015. https://doi.org/10.1108/MF-06-2016-0181