Liquidity provision and trading skill: Evidence from mutual funds' daily transactions

Examining risk-adjusted returns for executed trades over horizons of up to 1 year, we document strong evidence of short-term trading skill using daily mutual fund transactions from Finland. We find that trading performance is highly persistent up to the 1 month horizon, with an annualized Carhart abnormal return of 5.03% observed for both buys and sells. Moreover, the returns observed for the first week account for almost 36% of a fund's 1 year trade return, underscoring the significance of short-term trading in mutual funds. For the best-performing funds, this short-term performance also translates into sustained long-term outperformance. Investigating possible sources, we find that liquidity provision, rather than price pressure, is a significant contributor. In addition, short-term trading performance is significantly positively related to trade size, fund size, and expenses, depending on whether buys or sells are considered.