Why Do Mutual Funds Hold Lottery Stocks

The so-called gambling preferences is the investor’s preference for assets that have a small chance of getting a higher return.Individual investors,due to their betting preference,lack a clear and professional understanding of the investment object on the one hand,and have relatively fewer channels to obtain relevant information on the other,so they will show an irrational side in the actual investment.In recent years,from the phenomenon of fund hugging and hotspot speculation,institutional investors represented by funds also have a preference for betting.This paper investigates the reasons for the preference for betting stocks in China’s openend equity funds and pari-mutuel funds,where the fund’s bettingness measure is weighted by the average of the highest 5-day intra-month returns at the end of the last period of the stock and the position data disclosed in the fund’s periodic reports.This paper investigates the following questions: whether there is a betting pattern in the Chinese public fund market similar to that of the stock market;whether fund managers choose to hold betting stocks despite knowing that they are overvalued because of their own preference for betting stocks,or to attract fund investors who place too much emphasis on the short-term performance of stocks and blindly chase after betting stocks with bright short-term performance,thereby gaining fund capital inflows.Accordingly,this paper selects open-end equity funds and pari-mutuel funds from January 1,2005 to June 30,2022,and first calculates the bettingness of stocks,and constructs a fund-level bettingness measure based on the position data disclosed in the fund’s periodic reports.This paper mainly explores the relationship between fund bettingness and the fund’s future performance and future capital inflows.The results of the empirical study find that:(1)the bettingness indicator of fund positions does not positively predict future fund performance,and the more betting stocks a fund holds in the previous period,the worse the future fund performance,which indicates that buying funds based on the bettingness indicator of fund positions is an irrational behavior;(2)after controlling for factors such as fund historical returns,the bettingness indicator of fund positions is significantly positively related to fund inflows;(3)the bettingness indicator of fund positions is significantly(3)the positive predictive power of the betting indicator of fund positions on fund flows is not significant among institutional investors,but more significant among individual investors;(4)when a fund company has more selfownership of a fund,that fund will reduce its preference for betting stocks in the future.In addition,this paper replicates the previous study by replacing the measure of fund betting stocks with information disclosed in fund quarterly reports,and finds that the original empirical results still hold;this paper also divides the sample interval according to the development of the Chinese fund market,and finds that the original empirical results are strengthened within the subdivided sample interval.Therefore,the empirical results of this paper are robust.