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Mutual Fund Incubation and the Role of the Securities and Exchange Commission

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  • Carl Ackermann
  • Tim Loughran

Abstract

A mutual fund family incubates a fund when it creates a privately subsidized fund not available to the general investing public. It destroys unsuccessful incubator funds. The few successful funds will report higher incubation returns than the market return in advertisements intended to attract money from individual investors. This practice is currently allowed by the SEC. The evidence is that incubation returns are not a good predictor of subsequent fund performance and likely serve to mislead unsuspecting investors. Copyright Springer Science+Business Media, Inc. 2007

Suggested Citation

  • Carl Ackermann & Tim Loughran, 2007. "Mutual Fund Incubation and the Role of the Securities and Exchange Commission," Journal of Business Ethics, Springer, vol. 70(1), pages 33-37, January.
    • Handle: RePEc:kap:jbuset:v:70:y:2007:i:1:p:33-37
    DOI: 10.1007/s10551-006-9081-x
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    References listed on IDEAS

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    1. Brown, Stephen J. & Goetzmann, William N., 1997. "Mutual fund styles," Journal of Financial Economics, Elsevier, vol. 43(3), pages 373-399, March.
    2. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    3. Elton, Edwin J & Gruber, Martin J & Rentzler, Joel, 1989. "New Public Offerings, Information, and Investor Rationality: The Case of Publicly Offered Commodity Funds," The Journal of Business, University of Chicago Press, vol. 62(1), pages 1-15, January.
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    Cited by:

    1. Jezek, M., 2009. "Passive Investors, Active Traders and Strategic Delegation of Price Discovery," Cambridge Working Papers in Economics 0951, Faculty of Economics, University of Cambridge.
    2. Robert Battalio & Tim Loughran, 2008. "Does Payment For Order Flow To Your Broker Help Or Hurt You?," Journal of Business Ethics, Springer, vol. 80(1), pages 37-44, June.
    3. Bryant, Lonnie L. & Liu, Hao-Chen, 2011. "Mutual fund industry management structure, risk and the impacts to shareholders," Global Finance Journal, Elsevier, vol. 22(2), pages 101-115.
    4. William Johnson & Jennifer Marietta-Westberg, 2009. "The Distribution of IPO Holdings Across Institutional Mutual Funds," Journal of Business Ethics, Springer, vol. 90(2), pages 119-128, November.

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