Why would this be such a concern? The prices last Friday weren't good enough?During the conversation on CNBC, Jim Cramer commented on the obvious, "So we can either open tomorrow and get fake numbers, or we can open on Thursday and get real numbers?" Jim's comment suggested that money managers engage in price manipulation at month-end.
Aren't money managers perfect angels?
How could this be? Asset managers are perfect angels and would never attempt to manipulate prices to mislead investors...Turns out there is a lot of evidence that money managers manipulate month-end or year-end prices to mislead investors.
We provide evidence suggesting that some hedge funds manipulate stock prices on critical reporting dates. Stocks in the top quartile of hedge fund holdings exhibit abnormal returns of 0.30% on the last day of the quarter and a reversal of 0.25% on the following day. A significant part of the return is earned during the last minutes of trading. Analysis of intraday volume and order imbalance provides further evidence consistent with manipulation. These patterns are stronger for funds that have higher incentives to improve their ranking relative to their peers.
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.Prices on the last few days of the month drift upwards; these same stocks fall on the first few days of the next month.
For funds with greater incentives and greater opportunities to inflate returns, we find that (i) returns during December are significantly higher than those during the rest of the year even after controlling for risk in both time-series and the cross-section; (ii) this December spike is greater than that for funds with lower incentives and opportunities to inflate returns. These results suggest that hedge funds manage their returns upwards in an opportunistic fashion in order to earn higher fees. Finally, we provide strong evidence that funds inflate December returns by under-reporting returns earlier in the year but only weak evidence that funds borrow from January returns in the following year.
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.Incentive fees are normally determined as of December 31, which means managers have a huge incentive to get a high year end mark. As the chart above shows, December is clearly different than your typical month.
If you liked this post, don't forget to subscribe to Alpha Architect
Alpha Architect believes in a systematic, evidence-based, and fully transparent approach to asset-management. Please contact us to learn more
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees.
This information is not intended to, and does not relate specifically to any investment strategy or product that Alpha Architect offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.