Performance, Flow And Flexibility: A Study Of Chinese Mutual Funds

The determinants of mutual fund performance and flow have long been theheated discussed research topic, and yet the impact of holding constraints and bindingstatus on fund return, fund flow and the performance-flow relation, which can becrucial for a good understanding of China s mutual funds, has never been discussed inexisting literature.The thesis sets forth three hypotheses. First, the more flexible hybrid funds willnaturally be more likely to have better returns than the less flexible equity funds.Second, when the equity holding constraints are binding, the future return (both grossreturn and the Alpha) will be negatively affected. Third, when the equity holdingconstraints are binding, the flow will be negatively affected.For hypothesis1, though the gross return and the Alpha of the average hybridfund are both larger than those of the average equity fund, according to the differenceof means test, the differences are not significantly different from zero. Hypothesis2for gross return is fully justified by the regression results of both the hard bindingscenario and the soft binding scenario as the lower and the upper binding status bothhave a negative impact on the gross return. However, hypothesis2for Alpha is onlypartially justified as only the upper soft binding status negatively impacts the Alpha.Hypothesis3is also partially justified. For both the hard binding and the soft bindingscenario, the overall binding status has a negative impact on fund flow. However byseparating the lower and upper binding status, I find that the lower binding status hasa positive impact on fund flow while the upper binding status has a negative impacton fund flow.