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Interfund lending in mutual fund families: Role of internal capital markets

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  • Agarwal, Vikas
  • Zhao, Haibei

Abstract

Although the 1940 Act restricts interfund lending within a mutual fund family, families can apply for exemptions from the regulator to participate in interfund lending. We find that heterogeneity in portfolio liquidity and investor flows across funds, funds' investment restrictions, and governance mechanisms determine the applications for interfund lending. We document several costs and benefits of interfund lending after the application. Costs include lower sensitivity of managers' turnover to past performance and greater investor withdrawal for poorly governed funds. Benefits include funds holding more illiquid and concentrated portfolios, and being less susceptible to runs. Finally, well-governed funds perform better.

Suggested Citation

  • 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).
    • Handle: RePEc:zbw:cfrwps:1509r
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    More about this item

    Keywords

    funding liquidity; fund families; internal capital markets; fund performance;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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