The Invisible Hand of Internal Markets in Mutual Fund Families

65 Pages Posted: 10 Mar 2010 Last revised: 5 Mar 2018

See all articles by Luis Goncalves-Pinto

Luis Goncalves-Pinto

University of New South Wales (UNSW)

Juan M. Sotes-Paladino

Universidad de los Andes, Chile

Jing Xu

Renmin University of China - School of Finance

Date Written: January 25, 2018

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 (January 25, 2018). Journal of Banking and Finance, Vol. 89, 2018, Available at SSRN: https://ssrn.com/abstract=1567267 or http://dx.doi.org/10.2139/ssrn.1567267

Luis Goncalves-Pinto (Contact Author)

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

HOME PAGE: http://luis.goncalvespinto.com/

Juan M. Sotes-Paladino

Universidad de los Andes, Chile ( email )

Chile

Jing Xu

Renmin University of China - School of Finance ( email )

59 Zhongguancun Street
Beijing, 100872
China

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