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The invisible hand of internal markets in mutual fund families

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  • Goncalves-Pinto, Luis
  • Sotes-Paladino, Juan
  • Xu, Jing

Abstract

The internal markets of fund families can encourage member funds to deviate excessively from their investment mandates. Theoretically, we show that fund managers following sufficiently different style benchmarks can engage in risk-shifting by trading with one another at low cost inside their family. This benefits the managers and the family even in the absence of a family-level strategy. However, the excessive risks taken by the managers can be costly to fund investors. Empirically, we find support for the positive effect of intra-family style diversity on offsetting trades across funds and on deviations of funds’ portfolios from their benchmarks.

Suggested Citation

  • Goncalves-Pinto, Luis & Sotes-Paladino, Juan & Xu, Jing, 2018. "The invisible hand of internal markets in mutual fund families," Journal of Banking & Finance, Elsevier, vol. 89(C), pages 105-124.
    • Handle: RePEc:eee:jbfina:v:89:y:2018:i:c:p:105-124
    DOI: 10.1016/j.jbankfin.2018.02.001
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    Cited by:

    1. Agarwal, Vikas & Zhao, Haibei, 2016. "Interfund lending in mutual fund families: Role of internal capital markets," CFR Working Papers 15-09 [rev.], University of Cologne, Centre for Financial Research (CFR).
    2. Alexander Eisele & Tamara Nefedova & Gianpaolo Parise, 2015. "Are Star Funds Really Shining? Cross-trading And Performance Shifting In Mutual Fund Families," Post-Print hal-01458357, HAL.
    3. Covachev, Svetoslav & Yadav, Vijay, 2024. "Effect of sectoral holdings on the flow-performance sensitivity of mutual funds," The North American Journal of Economics and Finance, Elsevier, vol. 69(PB).
    4. Eisele, Alexander & Nefedova, Tamara & Parise, Gianpaolo & Peijnenburg, Kim, 2020. "Trading out of sight: An analysis of cross-trading in mutual fund families," Journal of Financial Economics, Elsevier, vol. 135(2), pages 359-378.

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    More about this item

    Keywords

    Mutual fund families; Cross-trading; Benchmarking; Stock illiquidity;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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