The Invisible Hand of Internal Markets in Mutual Fund Families
63 Pages Posted: 10 Mar 2010 Last revised: 8 Nov 2017
Date Written: November 6, 2017
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: Suggested Citation