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Portfolio Pumping, Trading Activity and Fund Performance

Author

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  • Sugato Bhattacharyya
  • Vikram Nanda

Abstract

We develop a model of trading by an informed fund manager compensated on the basis of her fund's Net Asset Value (NAV). We show that she has an incentive to pump her portfolio by buying securities she already holds. Pumping leads to excessive trading and hurts long-term fund performance. It also biases upward measured NAVs and contributes to closed-end fund discounts. Despite such costs, it may still be optimal to base her compensation on NAV. Copyright 2013, Oxford University Press.

Suggested Citation

  • Sugato Bhattacharyya & Vikram Nanda, 2013. "Portfolio Pumping, Trading Activity and Fund Performance," Review of Finance, European Finance Association, vol. 17(3), pages 885-919.
  • Handle: RePEc:oup:revfin:v:17:y:2013:i:3:p:885-919
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    File URL: http://hdl.handle.net/10.1093/rof/rfs017
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    Cited by:

    1. Li, Xiangwen & Wu, Wenfeng, 2019. "Portfolio pumping and fund performance ranking: A performance-based compensation contract perspective," Journal of Banking & Finance, Elsevier, vol. 105(C), pages 94-106.
    2. Zhe Chen & David R. Gallagher & Adrian D. Lee & Tom Smith, 2017. "Testing the effect of portfolio holdings disclosure in an environment absent of mandatory disclosure," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(1), pages 113-129, March.
    3. Vladimir Atanasov & John J. Merrick & Philipp Schuster, 2023. "Mismarking in Mutual Funds," Management Science, INFORMS, vol. 69(2), pages 1275-1300, February.
    4. Duong, Truong X. & Meschke, Felix, 2020. "The rise and fall of portfolio pumping among U.S. mutual funds," Journal of Corporate Finance, Elsevier, vol. 60(C).
    5. Rösch, Dominik M. & Subrahmanyam, Avanidhar & van Dijk, Mathijs A., 2022. "Investor short-termism and real investment," Journal of Financial Markets, Elsevier, vol. 59(PB).
    6. Saurin Patel & Sergei Sarkissian & Lauren Cohen, 0. "Portfolio Pumping and Managerial Structure," Review of Economic Studies, Oxford University Press, vol. 34(1), pages 194-226.
    7. Xu, Hedong & Tian, Cunzhi & Xiao, Xinrong & Fan, Suohai, 2018. "Evolutionary investors’ power-based game on networks," Applied Mathematics and Computation, Elsevier, vol. 330(C), pages 125-133.
    8. Ouyang, Liangyi & Cao, Bolong, 2020. "Selective pump-and-dump: The manipulation of their top holdings by Chinese mutual funds around quarter-ends," Emerging Markets Review, Elsevier, vol. 44(C).
    9. Ching-Chang Wang & Jerry Yu, 2018. "The holdings markup behavior of mutual funds: evidence from an emerging market," Review of Quantitative Finance and Accounting, Springer, vol. 50(2), pages 393-414, February.

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