From: Dr. Martin Rohleder
Sent: March 29, 2016
Subject: Comment regarding file numbers S7-24-15 and S7-16-15
To the U.S. Securities and Exchange Commission,
Dear Sir or Madam,
in context of proposed rules regarding the derivatives use of mutual funds (file number S7-24-15) and liquidity risk management of mutual funds (file number S7-16-15) we recently had the attached paper titled "Management of Flow Risk in Mutual Funds" published in the Review of Quantitative Financen and Accounting which might be of interest to the commission.
In the paper, we use information on investor gross flows and mutual fund option use from the electronic N-SAR filings of more than 2,500 actively managed US domestic equity mutual funds over the period from 1998 to 2013, matched with further fund specific data from the CRSP survivorship bias free mutual fund database.
Our findings indicate that:
1) 36% of the mutual funds in our dataset use derivatives of some kind at some point during our sample period. Such user funds use derivatives in ca. 70% of the time on average.
2) Using cross-sectional as well as two-stage least squares (2SLS) regressions, we show that mutual funds suffer significantly from flow risk, proxied for by mean absolute net investor flows flows.
3) The use of derivatives has a positive impact on fund performance.
4) This positive (direct) effect of derivatives on fund performance vanishes once we control for the interaction between flow risk and derivative use, our proxy for "flow risk management via derivatives".
5) "Flow risk management", however, has a significantly positive coefficient regarding performance indicating that funds use derivatives to successfully manage flow risk.
6) These results are robust to a wide range of different empirical designs and various performance measures explicitly controling for the non-linearities implied by the use of derivatives.
Overall, we conclude that the use of derivatives is beneficial to investors as equity mutual funds use derivatives successfully to manage flow risk and the resulting liquidity problems.
If you have any questions or need further information on the analyses conducted in our paper, please do not hesitate to ask.
Martin Rohleder, Dominik Schulte, Marco Wilkens
Dr. Martin Rohleder
Finance and Banking
University of Augsburg
The paper is available at:
M. Rohleder et al., Management of flows risk in mutual funds, Rev. Quant. Finan. Acc. (2015), http://dx.doi.org/10.1007/s11156-015-0541-1