• "ETF Rebalancing, Hedge Fund Trades, and Capital Market" 

with George Wang and Chelsea Yao

Featured in: The FinReg Blog sponsored by the Duke Financial Economics Center

Selected Presentations: Melbourne Asset Pricing Meeting, 2023; FMA, 2023; EFMA, 2023; 12th Portugese Finance Network Conference, 2023; 8th Paris Financial Management Conference, 2022; 28th Finance Forum, Nova, 2021.

Abstract: The embedded transparency and predictability of ETF rebalancing creates opportunities for anticipatory arbitrage trading by hedge funds (HFs). We document that ETF rebalancing is associated with strong price distortions of underlying securities. HFs front-run ETFs by gradually adjusting their arbitrage positions before ETF rebalancing in both equity and option markets. The front-running exaggerates the price impact of non-fundamental demand and forces ETFs to buy high and sell low. We find causal evidence which relates HF front-running to ETF rebalancing by exploiting the unique event of index rebalancing postponement in March 2020. Our findings highlight the hidden costs of ETF rebalancing. 

• "Against the Trend: Hedge Funds on the Other Side of Green Investing"

with George Aragon, George Wang, and Chelsea Yao

Abstract: We study hedge funds’ trading behavior in brown stocks. Specifically, we examine whether hedge funds exploit previously documented superior performance of brown firms and buy stocks with high carbon emissions. We show that hedge funds overweight brown stocks and underweight green stocks in their portfolios. We find that results are more pronounced in small hedge funds and non-PRI signatory hedge funds. We show that brown stocks purchased by hedge funds generate significant positive monthly returns. Interestingly, hedge funds buy brown stocks sold by mutual funds, which suggests that hedge funds trade on the other side of green investing

• "Under Pressure: Allegations and Behavior of Mutual Fund Managers"

with George Wang

Abstract: We investigate the impact of allegation occurrence on the mutual funds with mandatory disclosure. We find that investors avoid mutual funds involved in allegations and more likely to withdraw investments from mutual funds which are tainted to allegation in the subsequent two months. Interestingly, when considering the response of fund managers, allegation disclosure could cause excessive stress for manager as reflected in risk-shifting behaviour and more conservative trading. There is little evidence that more severe allegation leads to higher investor outflows. We find that stress of mutual fund managers is sensitive to the allegation fine amount, as they perform more conservative trades with larger fines.