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The Invisible Hand of Internal Markets in Mutual Fund Families

63 Pages Posted: 10 Mar 2010 Last revised: 8 Nov 2017

Luis Goncalves-Pinto

Chinese University of Hong Kong - Department of Finance

Juan M. Sotes-Paladino

The University of Melbourne - Department of Finance

Jing Xu

Renmin University of China - School of Finance

Date Written: November 6, 2017

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.

Keywords: Mutual Fund Families, Cross-Trading, Benchmarking, Stock Illiquidity

JEL Classification: C61, D60, D81, G11, G12, G23

Suggested Citation

Goncalves-Pinto, Luis and Sotes-Paladino, Juan M. and Xu, Jing, The Invisible Hand of Internal Markets in Mutual Fund Families (November 6, 2017). 28th Australasian Finance and Banking Conference. Available at SSRN: https://ssrn.com/abstract=1567267 or http://dx.doi.org/10.2139/ssrn.1567267

Luis Goncalves-Pinto (Contact Author)

Chinese University of Hong Kong - Department of Finance ( email )

Cheng Yu Tung Building
Shatin
Hong Kong
Hong Kong

Juan M. Sotes-Paladino

The University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia
+61 3 9035 9827 (Phone)
+61 3834 6914 (Fax)

Jing Xu

Renmin University of China - School of Finance ( email )

59 Zhongguancun Street
Beijing, 100872
China

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