Read Between the Filings Daily Mutual Fund Holdings and Liquidity Provision

Michael Farrell
August 2018

ABSTRACT

Many questions about mutual fund trading require daily holdings, yet mutual funds are only required to report quarterly holdings. I model intraquarter trading and use the genetic algorithm to estimate the trade pattern that is most consistent with the fund’s daily reported returns. I validate the model empirically on a sample of institutional trades from Ancerno and I confirm that the method more accurately predicts daily holdings when compared to existing naive assumptions. Further, my method is substantially more accurate in classifying a fund’s tendency to supply liquidity, and this increased precision has important implications for identifying superior performing funds. Specifically, a long-short strategy based on the model’s liquidity provision measures earns significant abnormal returns, while a similar strategy that relies on quarterly holdings does not exhibit any outperformance.