Money funds manage returns

Daily returns at quarter end are above the average by 12% for a sample of stable-NAV money market funds (MMFs) in China from 2011 to 2017. Crucially, quarter-end returns are significantly driven by the deviations between market-based and accounting-based NAVs. Further analyses indicate that returns are intentionally managed upward through NAV deviations to influence fund flows, with the important implication of wealth transfers among exiting, remaining and incoming investors. To the extent that wealth transfers are undesirable from a public policy perspective, our finding lends further support to recent reforms to institute floating-NAV MMFs in various countries including the United States and China.