Front-running of mutual fund fire-sales∗

Preliminary Version We show that a real-time trading strategy which front-runs the antici-pated forced sales by mutual funds experiencing extreme capital outflows can generate substantial returns. The profit stems from selling pressure among stocks that are below the NYSE mean size and cannot be ex-plained with the arrival of public information. We show that the largest stocks also exhibit downward price pressure, but prices revert before the front-running strategy can detect it. The duration of the anticipated sell-ing pressure has decreased from about a month in the 1990s to about two weeks in the most recent decade. Our results suggest that publicly avail-able information on fund flows and holdings can aggravate the situation of mutual funds that are already in distress. ∗We would like to thank seminar participants at the Rotterdam School of Management, Erasmus University Rotterdam, for useful comments