Liquidity Picking and Fund Performance

Using global mutual fund and ADR data, we test if funds strategically trade cross-listed firms' equity in the most liquid location – the United States or the domestic market. Funds that show such liquidity picking behaviour outperform those that do not. This result is robust to various performance tests, driven by superior stock-picking ability of both cross-listed and non-cross-listed stocks, and stronger for high active share funds. Liquidity picking mitigates funds' capacity constraints and creates $41.7 million in value-added for funds in the top tertile. Our tests provide direct evidence in favour of theories of informed trading in a multi-market setting