Who Trades Against Mispricing?

May 21, 2014 Leave a comment

Who Trades Against Mispricing?

Mariassunta Giannetti 

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Bige Kahraman 

Stockholm School of Economics – Department of Finance; Swedish House of Finance
April 1, 2014
Swedish House of Finance Research Paper No. 14-09

Abstract:      
We investigate whether redemption risk hinders managerial incentives to trade against mispricing (as argued by Shleifer and Vishny (1997)). We begin our analysis by comparing the trading behavior of closed-end funds – which are not subject to redemption risk – with that of open-end funds in stocks that are mispriced due to a fire sale or sentiment shocks. We find that closed-end funds purchase (sell) fire sale (purchase) stocks to a larger extent than open-end funds. Moreover, closed-end funds’ portfolios are more exposed to stocks that are likely to be undervalued because of negative sentiment shocks. Differences in trading behavior are more pronounced for stocks with higher arbitrage risk. Finally, we extend our analysis to hedge funds and show that hedge funds with share restrictions behave similarly to closed-end funds. Redemption risk thus appears to be an important impediment to arbitrage.

Filed under Investing Process

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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