Benchmark Backdating in Mutual Funds

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Abstract

We analyze mutual fund benchmark changes using hand-collect SEC prospectuses. Under existing rules, funds can change their self-designated benchmark indices and compare their historical returns to those of the new benchmarks, that is, funds can potentially ``backdate'' their relative performance. We find that funds take advantage of this loophole in order to retroactively embellish their performance along several dimensions. Funds with low past performance and flows and less sophisticated clientele are more likely to engage in this behavior. Benchmark changing is associated with other deceptive behavior like portfolio pumping.