Investor–Stock Decoupling in Mutual Funds

We investigate whether mutual funds whose investors and stocks are decoupled (i.e., investor location does not coincide with that of the stock holdings) benefit from a natural hedge as they have fewer outflows during market downturns and fewer inflows during upturns. Using a sample of equity mutual funds from 26 countries, we find that funds with higher investor–stock decoupling exhibit higher performance, and this is more pronounced during the 2007–2008 financial crisis. We also find that decoupling allows fund managers to take less risk, be more active, and tilt their portfolios toward smaller and less liquid stocks.

The Internet appendix is available at https://doi.org/10.1287/mnsc.2016.2681.

This paper was accepted by Wei Jiang, finance.