Timing Trades And Mutual Fund Investors

Abstract

Recently, a number of well known mutual funds advisors, including Strong, Putnam, and Bank of America, have been accused of or admitted to allowing selected institutional investors to engage in timing trades with the shares of some of the mutual funds they manage. The news media has generally taken the position that timing trades reduce the wealth of other fund investors. In this study, I show that timing trades can either increase, decrease, or leave unchanged fund shareholder wealth. Which outcome results will depend on specific timing trader and fund characteristics such as the frequency and accuracy of timing trader speculation, the trading of other fund shareholders, the return on the fund's security portfolio, and how much a mutual fund must increase its cash holdings to cover the transactions of timing traders. Consequently, whether timing traders harm other fund shareholders is an empirical question.